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.

There has been a lot of talk lately in the media about Roth Conversions due to the limits for such conversions being lifted for 2010.  Although the limits have been lifted it still does not mean that converting your IRA to a Roth IRA is the right thing to do. 

Previously those individuals whose modified adjusted gross income was more than $177,000 for married couples and $120,000 for singles were not able to contribute to a Roth IRA.  However, in 2010 individuals whose income is higher than these levels  are able to convert their traditional IRA’s to a Roth IRA. This does not mean that you can contribute to a Roth IRA this year if your income is above these limits.  It only means that you can covert existing IRA’s to Roth IRA’s.    With this conversion, however, comes a hefty tax implication as taxes for that year are owed on the full amount that is converted.  Therefore, although it may be a great opportunity for those who have previously not been able to participate in this investment tool it may not be the best choice for everyone.  Our opinion is that converting your IRA to a Roth IRA is only worth it if you have money set aside outside the IRA now to pay the taxes on the conversion. 

 If you would like to discuss your personal situation with us please feel free to call our office at 801-295-7373 to determine if this conversion would be beneficial for you. 

AD #: C10-19734

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.