The second GDP release for the third quarter points toward continued economic expansion in the near term, but with growth that is below the economy's potential. Certainly the deep downturn in consumer spending is over, which is contributing to a recovery. The fiscal and monetary stimulus is boosting demand. Also pointing to continued growth over the next few quarters are a rebound in homebuilding and a stabilization in business investment. Inventories fell in the third quarter, but at a slower pace, adding to GDP growth. And inventories will be a strong plus for growth over the next couple of quarters as firms start to add to their stocks in order to meet stronger demand. Stronger demand from overseas is boosting exports.

However, consumers remain anxious, and a rising unemployment rate will restrain the rebound in household spending. Profits are increasing, but more than 90% of the gain in the third quarter came from financial corporations. Nonfinancial profits did increase, for the second straight quarter, but the gain was small. Until nonfinancial corporate profit growth picks up, firms will be reluctant to invest and hire.

Real GDP growth is expected to be around 2% in 2010, below the economy's potential. This means the unemployment rate will continue to rise, peaking at close to 11% in the third quarter of next year. Economic growth will pick up in the second half of 2010, however, and then accelerate. Real GDP will expand 4% in 2011 and 5% in 2012. This will help bring down the unemployment rate as firms hire to meet stronger demand.

Investors halted a three-day losing streak on Monday as prices rallied higher on a weaker dollar and better-than-expected home sales numbers.  Major US stock indices jumped more than 1 percent, led by the Dow Jones industrials, which rose 133 points to a 13-month high.  The Standard & Poor’s 500 Index rallied over 1.4 percent to close at 1,106.24.  All 10 industry groups in the S&P 500 advanced, led by technology and financial companies.  Copper, a barometer for economic activity rallied to a 14-month high and gold reached a record as the Dollar Index fell for the first time in three days.  Meanwhile, bond prices retreated as investors regained their appetite for risk.

Investors found plenty reasons to buy as the day's developments pointed to two trends: an improving economy and interest rates that are expected to stay low.  Sales of existing U.S. homes increased 10 percent in October to the highest level since February 2007, National Association of Realtors data showed today.  Investors were buying Monday on somewhat contradictory forces in the market. The strength in housing is a sign of an improving economy, which could argue in favor of raising rates, while the dollar's weakness points to rates remaining low. Analysts say investors who still have plenty of available cash are primed to buy, and so the market may also be rising on its own momentum.

U.S. equities fell for a third straight day, with the S&P 500 dropping 0.2 percent over the past five days to cap its first weekly decline since October. The Dow Jones Industrial Average lost 14.28 points, or 0.1 percent, to 10,318.16 and was up 0.5 percent in the week. Declines were limited today as Pfizer Inc. and Merck & Co. led gains in drugmakers while J.M. Smucker Co. paced an advance in consumer staples companies.  The tech-focused Nasdaq Composite Index was off 0.5%, hurt in part by a 9.3% decline in Dell. The S&P 500 was off 0.3% at 1091, led by a 0.7% decline in the energy sector.

The S&P 500 rose as much as 64 percent from a 12-year low in March, closing at a 13-month high on Nov. 17. The deepest U.S. economic contraction in seven decades ended in the third quarter, when government incentives spurred spending on homes and cars. Corporate profits, which have shrunk for a record nine straight quarters, are projected to rise in the current period, according to analysts.  Confidence that the Federal Reserve will keep its interest-rate target near zero well into 2010 lifted major stock indexes to fresh 13-month highs earlier this week. Traders and analysts say the flow of cheap money now is going into other assets.

The dollar rallied against the euro and most other foreign currencies after the European Central Bank took steps toward unwinding stimulus measures installed to buoy the financial system after the global credit crisis last year. The bank said in a surprise announcement that it will tighten the standards under which it accepts newly issued asset-backed securities as collateral from banks.  The dollar's gains weighed on commodities.  Oil futures were off about 74 cents, hovering at $77 a barrel in New York. But gold managed a gain of $8.40 to trade at $1,150 per ounce in New York.

U.S. stocks extended a global drop as concern grew that the rally has outpaced the prospects for economic growth and Bank of America Corp. downgraded chipmakers. Technology stocks drove the broad-based U.S. sell-off on Thursday, while economic data underscored the fragility of the recovery.  The yen and the dollar strengthened, oil tumbled and yields on six-month Treasury bills reached a 50-year low. Gold gained.  On the session, decliners outpaced advancers by a 4:1 margin. The sell-off was broad-based, with all but four of the Dow's 30 stocks ending lower. Among other hard-hit sectors were financials, industrials and consumer discretionaries. 

In late trading Dell fell 6.7 percent to $14.80 after falling 19 cents to $15.87 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have gained 55 percent this year.  Revenue fell 15 percent to $12.9 billion, missing the average analyst estimate of $13.2 billion, according to Thomson Reuters I/B/E/S.  Although Dell did not provide a formal outlook, it said it expects fourth-quarter revenue to improve from the third quarter.

 Overall, the slow healing in homebuilding appears to have topped out in recent months. Total housing starts have been stuck in the 500,000 to 600,000 range all year, but this month they moved down from the higher end of that range. The single-family segment is by far healthier, but even single-family starts have flattened in recent months, after improving steadily in the first half of the year. The descent in multifamily construction is flattening, but there is still no sign of upward momentum. The outlook still calls for an improvement in starts, albeit a modest one, over the next several quarters. This outlook hinges heavily on the job losses abating and a good number of foreclosure modifications working.

The disappointing October residential construction report may result from the impending end to the first-time homebuyer tax credit. Buyers retreated from the new-home market as it became increasingly risky that a home sale would be completed before the tax credit was set to end on November 30. On this front, the extension and expansion of the tax credit will help over the next three quarters. Not only has the credit been extended to include homes that are contracted to be purchased by April 30, 2010, but it has also been expanded to include existing homebuyers. Income limits have been increased as well.

Other key drivers of housing demand are mixed. Mortgage interest rates remain low, house prices are low, and affordability is high—all forces that will help lift demand. However, credit availability is constrained and job growth is still absent. Further, foreclosures still weigh heavily on new-home demand, and the number of distressed properties on the market will only get worse before it improves.

One positive element of the October report is that completions increased for the first time in months, suggesting that builders are working through the improvement in orders over the past several months. Further, single-family starts and completions are running at about the same pace for the first time since the housing market began its collapse in 2006. During the correction, housing starts had fallen short of completions, a reversal from normal trends. The fact that completions are on par with starts indicates that builders have the capacity to ramp up starts—certainly inventories of new homes are low. The key question is whether the demand for new homes is there.

U.S. stocks ended a low-volume session down slightly on Wednesday, though well off earlier lows, after a weak report on housing construction and earnings in the technology sector dimmed investor sentiment. The Dow Jones Industrial Average lost 11 points to end at 10,426, weighed down by 12 of its 30 components.  The S&P 500 index was down .52 at 1,109. The Nasdaq composite index was down 10.64 at 2,193.

Since late October, the prices of U.S. stocks and government bonds have been rising together, signaling that for now at least, investors remain in the sweet spot: Enjoying an environment in which interest rates are low and inflationary prospects are tame.  In normal times, bonds should be moving in the opposite direction of stocks. A growing economy lifting the outlook for profits and stocks means that government bonds, the safest assets around, aren't that attractive, especially if inflation is perceived to erode the value of the fixed returns they provide.  The yield on two-year notes, which is closely tied to the outlook for interest rates controlled by the Federal Reserve, rose from 0.76% at the start of the year to 1.4% in June. The yield on 10-year notes which is more of a reflection of inflation expectations, rose from 2.25% to 3.93% during the same period.  But since then, as stocks continued to power ahead to reach fresh 13-month highs, yields on two-year notes have fallen back to 0.76% currently, and those on 10-year bonds are back down to 3.319%.  The theme is now familiar. In voting to keep interest rates near zero-percent levels earlier this month, the Federal Reserve has also sent multiple signals that it would keep them there for the foreseeable future, noting that inflation pressures remained subdued.

Stock futures are pointing to a modestly higher opening Wednesday as investors await the latest report on the housing market.  Investors will be looking to see if the housing sector can build off on the positive news in the retailing sector the last two days.

The Commerce Department is expected to report construction of new homes and apartments grew 1.7 percent to a seasonally adjusted annual rate of 600,000 in October. Building permits, seen as a good indicator of future activity, are expected also expected to edge up 1.2 percent to an annual rate of 580,000 units.  Housing sales had been boosted by a government tax credit for first-time homebuyers, which was recently extended through June after it was set to expire at the end of November.  Any positive news in the homebuilding sector could further the recent strength in the market and pry more stock buyers off the sidelines.

Ahead of the opening bell, Dow Jones industrial average futures rose a modest 22, to 10,420 while Standard & Poor's 500 index futures rose 2.80, to 1,110.20.  The tech laden NASDAQ 100 index futures rose 4.00, or 0.2 percent, to 1.812.75.

Additionally later on today investors will get a look at inflation at the retail level. The Labor Department's Consumer Price Index, likely rose 0.2 percent in October, economists predicted. That would match September's increase. Excluding volatile food and energy prices, "core" consumer prices likely rose 0.1 percent last month.   Though many prognosticators keep predicting surging inflation it continues to be of little concern to the market as rising unemployment, nervous consumers and tight credit have kept prices stable.

 

 

In TV commercials and across the Internet, managers of exchange-traded funds tout the tax advantages of their products.

But according to a story in the latest issue of Barron's, many investors in precious-metals ETFs have to deal with an unwelcome surprise come April 15.

The issue is that gold and silver fall under the heading of "collectibles" in the eyes of the Internal Revenue Service, making these metals similar to artworks, antiques, vintage wine and rare baseball cards.

This status means that profits from gold and silver investments do not qualify for the 15 percent maximum on long-term capital gains that pertain to stock and mutual fund investments.

These profits are instead taxed at a 28 percent maximum if held for more than a year, and at ordinary income rates if held for less than a year.

With the rapid appreciation of gold in recent years - the current price is nearly double where it was in early 2007 — many investors who cashed out their gains in gold ETFs may be hit with unexpectedly big tax bills.

The same liability may hold true for investors who didn't sell a single share of their gold ETF. That's because when the ETF itself sells physical gold or silver, any gains or losses are passed along to investors, who then face the maximum 28 percent tax liability even if they didn't actually realize the gain.

Not all gold-related ETFs are considered collectibles, but for those that are, investors should be aware of the rules so they can weigh the advantages and disadvantages of their investment options.

Here is a link to the Barron's story (subscription required):

Gold Is Precious to the IRS, Too

U.S. stocks rallied across the board hitting 13-month highs on the heels of a rebound in retail sales.  In addition to stocks, commodities were also buoyed by the news that Asian government leaders pledged to maintain economic stimulus spending.  While stocks were strong the US dollar dropped to a 15-month low and two-year Treasury note yields fell to their lowest level since January.

While stock price rose Federal Reserve Chairman Ben S. Bernanke was quick to caution that we aren’t out the woods yet, noting that economic “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery.   Bernanke speaking to the Economic Club of New York further opined,  “Significant economic challenges remain,” and the “The flow of credit remains constrained, economic activity weak and unemployment much too high. Future setbacks are possible.”

On the session advancers outpaced decliners on the NYSE by a margin of nearly 5 to 1.  The NASDAQ was nearly as strong with while advancing stocks holding a 3 to 1 edge over declining issues.