QUOTE OF THE QUARTER

“The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.”
– John Foster Dulles

QUARTERLY TIP

Consider deducting $20 or $40 a week from your paycheck to put into your savings. For example, automatic weekly savings transfers of just $40 would mean an additional $2,000 a year for your nest egg and likely won’t affect your lifestyle.

A review of 3Q 2010 

THE QUARTER IN BRIEF
Talk about a rollercoaster: stocks soared in July, tanked in August, and rebounded spectacularly in September, and 3Q 2010 wound up being the best quarter on Wall Street in a year, with the S&P 500 climbing 10.72%.¹ It was also a fine quarter for many commodities. The quarter was also distinguished by rock-bottom mortgage rates (and a housing market that seemed to have bottomed out). Deflation fears subsided; anxieties about debt in the Eurozone didn’t. While Wall Street advanced, consumers grew increasingly impatient with the pace of the recovery.

DOMESTIC ECONOMIC HEALTH
When the quarter began, deflation and unemployment were the concerns on many minds. Assumptions of deflation ebbed as the Consumer Price Index rose 0.3% in both July and August. Unemployment, on the other hand, moved slightly north to 9.6% from 9.5% in July (well, that was better than the 9.9% rate back in April). The Federal Reserve made no move with interest rates in the quarter.^2,3

Americans were spending a little more: statistics from the Commerce Department showed personal spending was up 0.4% in both July and August; personal incomes were up 0.2% in July and 0.5% in August. The personal savings rate actually increased as well over those two months, from 5.7% to 5.8%.⁴ Yet consumer confidence was shaky: the Conference Board’s monthly consumer confidence index went from 51.0 to 53.2 to 48.2 across the quarter, and the Reuters/University of Michigan barometer went from 67.8 to 68.9 to 68.2 across that span.^5,6

We had decent growth in the service and manufacturing sectors according to the Institute for Supply Management indexes The ISM manufacturing index over the quarter went from 55.5 in July to 56.3 in August to 54.4 in September (the lowest number since November 2009). Incidentally, durable goods orders were up 0.7% in July and down 1.3% in August (but minus transportation orders, durable goods orders rose 2.0% in that month). ISM’s service sector index was 54.3 for July, an unnerving 51.5 in August and then 53.2 for September.^7,8,9

The Obama administration tried to combat the perception that it (and the Federal Reserve) has basically run out of options to rev up the economy. With strokes of his pen, the President extended emergency jobless benefits for the long-term unemployed for another six months in July and gave homebuyers more time to claim federal tax credits. He also signed a long-stalled, finally-passed bill creating a $30 billion fund to encourage business loans at community banks (and hopefully, business hiring and expansion).^10,11,12 The Dodd-Frank financial reform bill (the “no more bailouts” bill) also became law: it authorized the creation of a new Consumer Financial Protection Bureau, created more transparency in the derivatives market, and set the FDIC insurance limit permanently at $250,000.^13,14

GLOBAL ECONOMIC HEALTH
In July, the EU and the International Monetary Fund arranged a bailout of roughly $1 trillion U.S. for Greece and other debt-plagued EU nations. But the story wasn’t over: by the quarter’s end, Moody’s had downgraded Spain’s credit rating and Ireland’s central bank was arranging a massive bank bailout that would balloon its deficit to 32% of its GNP. The EU conducted a stress test of 91 banks in the quarter, and all but a handful passed; many economists scoffed at the test.^15,16

As for economic expansion, mixed signals rolled in. In Europe, the respected Markit Purchasing Managers Index slid to 53.6 in September, indicating the slowest pace of growth since February. On the other hand, China’s Manufacturing PMI hit a four-month peak in August … yet growth within its service sector hit a 19-month low in September, while India’s service sector expansion also cooled to a 10-month low. The JPMorgan global services purchasing managers’ index was 53.5 in August and dipped a bit to 52.3 in September.^17,18

WORLD MARKETS
Let’s take a look around the world and see some of the 3Q gains. Three indices in Southeast Asia put up some amazing 3Q numbers: Thailand’s SET, +22.3%; the Philippines PSE Composite, +21.6%; Indonesia’s JSX Composite, +20.2%. Other gains from the region: India’s Sensex, +13.4%; Hong Kong’s Hang Seng, +11.1%; South Korea’s Kospi, +10.3%; China’s Shanghai Composite, +10.7%. In Europe, the German DAX was up 6.5% for the quarter, France’s CAC 40 advanced 10.3% and England’s FTSE 100 advanced 15.6%. The Brazilian Bovespa rose 13.4% and the Russian RTSI gained 14.5%. How did the MSCI indices do in the quarter? The World went +13.24% and the Emerging Markets Index went +17.16%.^19,20,21

COMMODITIES MARKETS
Crops and metals had a great third quarter, and oil advanced nicely as well. Gold surpassed the $1,300 mark and futures rose 5.1% on the quarter, but other metals certainly outdid that advance: platinum rose 7.9%, silver gained 16.6%, nickel advanced 18.1%, copper jumped 24.2%, palladium futures soared 28.5%, lead rose 30.9%, and tin leaped 40.8% (big demand from China). Wheat had its best quarter in three years, gaining 45.0% (a drought plus wildfires in Russia were big influences). Sugar prices went up 40.3% on the quarter, corn gained 39.9% and soybeans advanced 16.7%.^22,23,24 Oil prices rose 5.74% in the 3Q while natural gas futures fell 16.72%. As for the U.S. Dollar Index, it dipped 8.44% on the quarter.^25,26

REAL ESTATE
Well, things got even worse on the homebuying front – and then they got just a tiny bit better, with everyone still wondering if the real estate downturn had finally bottomed out. A sunset on federal tax breaks hurt the numbers. New home sales were flat for August after a revised 7.7% drop in July; August 2010 sales were down 28.9% from a year ago and the median sale price declined 1.2% in that time. As for the crucial indicator here – sales of existing homes – the news was, to put it mildly, not good. In July, residential resales hit a 15-year low, falling 27.2% in the process. August was the second-lowest month on record for the last 15 years, but a 7.6% improvement from July. Pending home sales did improve by 4.3% in August.^27,28,29

If you were able to buy a home (or refinance one), you could take advantage of mortgage rates that recalled the Eisenhower era. Over the quarter, rates on conventional 30-year home loans went from 4.58% to 4.32%. Rates on a 15-year fixed averaged 4.04% at the start of July and just 3.75% at the end of September. Average rates on the 5-year ARM moved down from 3.79% to 3.52% in that stretch, and so did average rates on the 1-year ARM, going from3.80% to 3.48%.³⁰

LOOKING BACK…LOOKING FORWARD
At the end of August, did you expect that the third quarter would turn out like this? Stocks were well into negative territory YTD and we were heading into what is traditionally the poorest month of the year on Wall Street. As the numbers below indicate, things turned around.

Source: cnbc.com, bigcharts.com, ustreas.gov, bls.gov – 9/30/10^1,31,32,33

Indices are unmanaged, do not incur fees or expenses, and cannot be invested into directly.

These returns do not include dividends.

As the fourth quarter begins, we are not quite out of the woods: you might see the market react negatively to everything from less-than-expected partisan change in midterm elections to oncoming rising capital gains tax rates to sovereign debt concerns in the EU. Much attention could be focused on the November 3 Fed meeting, especially if economic indicators across the bulk of October are underwhelming. (Many economists think the Fed will start buying Treasuries again to help pressure interest rates.) The optimism on Wall Street right now might be aided by the potential of the fall earnings season and further encouraging data about consumer confidence, consumer spending, and the manufacturing and retail sectors. Let’s hope the bulls aren’t scared off – another quarter like this one would allow 2010 to be a decent year for stocks.

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This information should not be construed as investment 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. The Stock Exchange of Thailand (SET) is the national stock exchange of Thailand. The PSE Composite Index, commonly known previously as the PHISIX and presently as the PSEi, is the main stock market index of the Philippine Stock Exchange. The JSX Composite is an index of all stocks that trade on the Indonesia Stock Exchange. BSE Sensex or Bombay Stock Exchange Sensitivity Index is a value-weighted index composed of 30 stocks that started January 1, 1986. The Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. The Korea Composite Stock Price Index or KOSPI is the index of all common stocks traded on the Stock Market Division. The SSE Composite Index is an index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange. The DAX 30 is a Blue Chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a narrow-based, modified capitalization-weighted index of 40 companies listed on the Paris Bourse. The FTSE 100 Index is a share index of the 100 most highly capitalized companies listed on the London Stock Exchange. The Bovespa, the benchmark stock index of Brazil, is the second largest in the Americas, and the leading exchange in Latin America. The RTS Index (RTSI) is an index of 50 Russian stocks that trade on the RTS Stock Exchange in Moscow. The MSCI World Index is a free-float weighted equity index that includes developed world markets, and does not include emerging markets. The MSCI Emerging Markets Index is a float-adjusted market capitalization index consisting of indices in more than 25 emerging economies. 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 other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. www.montoyaregistry.com www.petermontoya.com

Citations.

1 – cnbc.com/id/39444625/ [9/30/10]

2 – online.wsj.com/article/BT-CO-20101001-706591.html [9/17/10]

3 – ncsl.org/?tabid=13307 [9/3/10]

4 – online.wsj.com/article/BT-CO-20101001-706591.html [10/1/10]

5 – tradingeconomics.com/Economics/Consumer-Confidence.aspx?Symbol=USD [10/5/10]

6 – briefing.com/Investor/Public/Calendars/EconomicReleases/mich.htm [10/1/10]

7 – forbes.com/2010/09/24/durable-goods-housing-markets-equities-new-home-sales.html [9/24/10]

8 – briefing.com/Investor/Public/Calendars/EconomicReleases/napm.htm [10/1/10]

9 – briefing.com/Investor/Public/Calendars/EconomicReleases/napmserv.htm [10/5/10]

10 – washingtonpost.com/wp-dyn/content/article/2010/07/22/AR2010072203825.html [7/22/10]

11 – marketwatch.com/story/home-buyers-win-more-time-to-claim-tax-credit-2010-07-02 [7/2/10]

12 – washingtonpost.com/wp-dyn/content/article/2010/09/16/AR2010091600568.html [9/16/10]

13 – usatoday.com/money/industries/banking/2010-07-22-regs22_ST_N.htm [7/22/10]

14 – latimes.com/business/la-fi-financial-reform-20100716,0,2303004.story [7/16/10]

15 – google.com/hostednews/ap/article/ALeqM5jBXhqoTrl7rt2PecP1DmklW1Pi1gD9HC02E80 [8/3/10]

16 – money.cnn.com/2010/09/30/markets/world_markets/ [9/30/10]

17 – foxbusiness.com/markets/2010/09/23/euro-zone-flash-pmi-falls-optimism-rises/ [9/23/10]

18 – businessweek.com/news/2010-10-04/most-asian-stocks-rise-on-china-growth-hopes-japan-banks-fall.html [10/4/10]

19 – reuters.com/article/idUSN0520564920101005 [10/4/10]

20 – marketwatch.com/story/asias-best-and-worse-stock-market-for-the-quarter-2010-09-30 [9/30/10]

21 – emerginvest.com/WorldStockMarkets//World_Markets.html [10/5/10]

22 – mscibarra.com/products/indices/international_equity_indices/gimi/stdindex/performance.html [9/30/10]

23 – bullionpricestoday.com/2010-third-quarter-gold-silver-platinum-and-palladium-prices-soar/ [9/30/10]

24 – online.wsj.com/article/SB10001424052748704791004575520533374897688.html [10/1/10]

25 – blogs.wsj.com/marketbeat/2010/09/30/data-points-energy/ [9/30/10]

26 – online.wsj.com/mdc/public/npage/2_3051.html?mod=mdc_curr_dtabnk&symb=DXY [10/5/10]

27 – foxbusiness.com/markets/2010/09/24/data-snap-aug-new-home-sales-expectations/ [9/24/10]

28 – dailyfinance.com/story/investing/augusts-bounce-in-existing-home-sales-scant-progress/19645604/ [9/23/10]

29 – news.yahoo.com/s/ap/20101004/ap_on_bi_ge/us_pending_home_sales_3 [10/4/10]

30 – freddiemac.com/pmms/release.html [9/30/10]

31 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=9%2F30%2F09&x=0&y=0 [10/4/10]

31 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=9%2F30%2F09&x=0&y=0 [10/4/10]

31 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=9%2F30%2F09&x=0&y=0 [10/4/10]

31 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=DJIA&close_date=9%2F29%2F09&x=0&y=0 [10/4/10]

31 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=COMP&close_date=9%2F29%2F09&x=0&y=0 [10/4/10]

31 – bigcharts.marketwatch.com/historical/default.asp?detect=1&symbol=SPX&close_date=9%2F29%2F09&x=0&y=0 [10/4/10]

32 – ustreas.gov/offices/domestic-finance/debt-management/interest-rate/real_yield_historical.shtml [9/30/10]

33 – treasurydirect.gov/instit/annceresult/press/preanre/2000/ofm11200.pdf [7/12/00]