Permanent Value

3rd Quarter Review

Bruce Doole
October 17th, 2011

The word “volatile” has been so overused in the media, but it’s hard to find a better way to describe recent movements in the financial markets. On any given day, the markets can rise or fall based on the latest thinking about euro-zone sovereign debt problems, a possible U.S. or Chinese recession, weak banks, inflation, deflation, or poor job numbers.

In the just completed third quarter, uncertainty (there’s another overused word!) was in full bloom as the three major U.S. stock market indices posted double-digit declines, according to Barron’s. Was the market sniffing out a new recession? Possibly. Last week, the respected Economic Cycle Research Institute was quoted in MarketWatch as saying, “The U.S. economy is headed for another recession that government intervention cannot prevent.”
Along those same lines, Goldman Sachs said we may be moving from the 2007-2009 “Great Recession” to an upcoming “Great Stagnation.” As quoted by Bloomberg, Goldman Sachs said a “Great Stagnation” would be characterized by “‘high and sticky’ unemployment, an average 0.5 percent growth rate in per capita gross domestic product, and stock markets that underperform historical averages.”

But, not everyone agrees with that assessment. Warren Buffett told CNBC last week, “it’s very, very unlikely we’ll go back into a recession.”

So, who are you going to believe? The market’s jumpiness may reflect the fact that smart people have completely different views of the economy.



Here are a few things that made the headlines in the third quarter and may affect the markets over the final three months of the year:

  • The S&P 500 index dropped 14.3 percent in the third quarter and is now down 10.0 percent for the year. 

What to Watch: Third quarter corporate earnings will start rolling in soon and investors will scour them for any sign of weakness. For the past few quarters, strong earnings helped the market recover from the Great Recession. While some earnings weakness may already be priced in the market, we have to wait for the actual earnings to see how the market reacts.

  • Commodities and precious metals experienced significant price movements during the quarter. Gold prices finished the quarter up 8 percent, while silver dropped 14 percent, according to MarketWatch. Oil prices declined 17 percent for the quarter, while copper dropped a stunning 26 percent. On the agricultural side, corn prices finished the quarter down 25 percent from their June 10 all-time high, according to The Wall Street Journal.

What to Watch: Recent declines in oil and copper prices are particularly noteworthy because they may presage a slowing worldwide economy. If the declines continue, it may not bode well for stock prices.

  •  The housing market is still weak and that puts a significant drag on economic growth. According to the most recent S&P/Case-Shiller Home Price Indices, housing prices around the country are back to where they were in the summer of 2003.

What to Watch: Mortgage rates are at a record low yet the housing market is still in the doldrums, according to Bloomberg. Any sign that housing is turning the corner could bode well for the economy and the markets. 

  • Interest rates on U.S. government securities dropped significantly in the third quarter as the flight to safety continued. The yield on the 10-year Treasury note recently hit a paltry 1.67 percent — the lowest yield since the 1940s. While low rates are good for businesses and our indebted government, it’s bad for savers who rely on interest income to support their living expenses.

What to Watch: If interest rates keep dropping in the fourth quarter, it may suggest investors are still in a fearful state. Ironically, it could be a good thing to see interest rates rise — as long as it’s due to economic growth and not due to money printing by the Federal Reserve.

  • Sovereign debt woes in Europe and budget wrangling in the U.S. weighed on the financial markets in the third quarter.

What to Watch: Continued bad news here could be very problematic. However, if there’s any concrete resolution to the Euro-zone debt problems or a credible bi-partisan budget solution in Washington — look out. The financial markets could rally strongly on that kind of news.

With the above issues looming, you can see why the markets are a bit nervous. Yet, even if the market swoons in the fourth quarter, it could make valuations so compelling that it sets the stage for the next bull market.

Second Quarter Review

Bruce Doole
July 12th, 2011

The Markets

If that looks like Greek to you, that’s because, well, it is. It’s Greek for “extend and pretend” and that’s what happened last week to Greece’s debt problem.

Deeply in debt, Greece’s parliament passed legislation filled with tax increases, spending cuts, and privatization plans “aimed at meeting European Union aid requirements and staving off default,” according to the Sydney Morning Herald and Bloomberg. By passing the austerity plan, Greece is now in line to receive as much as $124 billion in new financing to keep the country afloat.

With immediate default now off the table, investors breathed a sigh of relief and helped send the S&P 500 to its biggest weekly gain in two years, according to Bloomberg.

A positive manufacturing report from the Institute for Supply Management, a rebound in auto sales, and strong quarterly earnings from Nike also helped send the market soaring, according to CNBC.

It’s rather amazing how sentiment in the financial markets can change so quickly. The market had fallen in seven of the previous eight weeks on various economic and political concerns, but then exploded like a supernova last week. One thing we can say about the financial markets is there’s never a dull moment!



Data as of 7/1/11






Standard & Poor’s 500






Notes: * This newsletter was prepared by Peak Advisor Alliance. * The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. * The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. * The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.* Past performance does not guarantee future results.* You cannot invest directly in an index.* Consult your financial professional before making any investment decision.

What to Watch in the Second Half of the Year

With the first half of 2011 now history, here are a few things that made the headlines and may affect the markets over the second half of the year, according to The Wall Street Journal:

• The Dow Jones Industrial Average had a volatile six months, but managed to end June on a high note and finish the first half of the year up 7.2%.

What to Watch: The end of quantitative easing, ongoing European sovereign-debt issues, and the U.S. budget battle could keep investors on edge over the summer. In addition, any signs that the current “soft patch” in the economy could turn into a new recession would not be received well by investors.

• Various commodities took a price hit the past couple months including crude oil, wheat, corn, copper, and silver. Yet, by historical standards, many commodity prices are still very high and causing discomfort to consumers around the world.

What to Watch: China, India, and Brazil are a major source of commodity demand and they are trying to rein in price inflation by slowing their economy. How successfully they manage this may determine the future demand for commodities and, by extension, impact inflationary pressure.

• The initial public offering of internet stars LinkedIn and Pandora stirred talk of a new internet bubble. LinkedIn, for example, doubled in price on its opening day.

What to Watch: While we’re not close to the hysteria from late 1999, any signs of a bubble bear watching because when they burst, it’s usually painful for the markets.

• Interest rates on U.S. government securities dropped significantly in the past few weeks as concern about a slowing U.S. economy and debt troubles in Europe caused investors to flee to the perceived safety of U.S. treasuries. However, interest rates turned up at the end of the second quarter as the Greek situation eased and some data on the U.S. economy improved.

What to Watch: Any significant change in the level of interest rates – either up or down – could move the stock market. With macro issues such as the end of quantitative easing, an uneven U.S. recovery, European debt woes, and the Washington budget battle still swirling around, interest rates could be volatile and we’ll continue monitoring them.

With macro events continuing to dominate the headlines, investors seem to be alternately optimistic and despondent about the markets depending on which way the macro winds blow. This topsy-turvy market makes it psychologically difficult for investors but, we’re doing our best to maintain an even keel on your behalf.

Weekly Focus – Happy Independence Day!

So let freedom ring from the prodigious hilltops of New Hampshire.
Let freedom ring from the mighty mountains of New York.
Let freedom ring from the heightening Alleghenies of Pennsylvania!
Let freedom ring from the snowcapped Rockies of Colorado!
Let freedom ring from the curvaceous peaks of California!
But not only that; let freedom ring from Stone Mountain of Georgia!
Let freedom ring from Lookout Mountain of Tennessee!
Let freedom ring from every hill and every molehill of Mississippi.
From every mountainside, let freedom ring.

Martin Luther King, Jr.

First Quarter Review

Bruce Doole
April 5th, 2011



It may not have felt like it, but the stock market, as measured by the S&P 500, rose 5.4% during the quarter. Despite some trying moments, the market rose “amid growing optimism that the recovery from the financial crisis had become self-sustaining, according to The Wall Street Journal. The stock market seems to have taken to heart the U.S. Postal Service commercial that said, “…neither snow, nor rain, nor heat, nor gloom of night, nor the winds of change, nor a nation challenged, will stay us from the swift completion of our appointed rounds.” In this case, the “appointed rounds” was a stock market that went up.

Here are the returns from a few other countries:

First Quarter Country Returns Based on the Dow Jones Global Indexes Ranked by U.S. Dollar Performance


Political instability in the world’s leading oil-producing region sent shockwaves through the oil market. In fact, during a 13-day period in February, oil prices rose a stunning 25%. For the quarter, they rose 16.8% and settled above $100 per barrel, according to The Wall Street Journal. Should oil prices remain above $100 per barrel for an extended period, it could become a drag on global economic growth and may lead to pressure on stock prices. About the only good news on oil prices is they are still well below the $145 per barrel price reached in 2008.


Pardon the poor grammar above, but the dollar keeps sliding. During the quarter, it lost 5.7% against the euro, 2.4% against the Japanese yen, 2.8% against the British pound, 1.2% against the Australian dollar, and 1.6% against the Brazilian real, according The Wall Street Journal. There was no flight to safety in the dollar during the quarter despite the Middle East problems, the Japanese triple tragedy, and the continuing sovereign debt issues in Europe.

Low interest rates in the U.S. appear to be the main culprit in keeping pressure on the value of the dollar. Low rates make the dollar less attractive relative to other countries that may offer higher rates. The good news is a weak dollar makes our exports cheaper and that may help some of our large, multi-national companies. Analysts are keeping an eye on the Federal Reserve for any sign of a change in monetary policy. Once they start raising rates, which many analysts don’t expect until 2012, it could lend some support to the dollar, according to The Wall Street Journal.


How scared are investors? One way to measure fear in the market is to look at the CBOE Market Volatility Index — the “fear gauge” known as the VIX. This measure rose significantly during the height of concern over the Japanese earthquake. In fact, it jumped 20% in one day in Mid-March before declining 39% over the next week, according to The Wall Street Journal and Bloomberg. Despite all the gyrations, the VIX ended the quarter roughly flat.


There’s no shortage of things to worry about in the market, but the strength of the economy and the expectation that corporate earnings will hold up seem to outweigh any nervousness over geopolitical issues or natural disasters. Some key things to monitor over the next few months include commodity prices, interest rates, the status of QE2, and, of course, corporate earnings. As always, we have our hands full!

WEEKLY FOCUS – Think About It

“How much pain have cost us the evils that have never happened.”

–Thomas Jefferson