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November 5th 2010 Commentary

Making Sense of the Recent News 

This week provided the investing community with a flurry of significant news events that drove the direction of the markets. There was much attention paid to the election results, the Federal Reserve meeting and the employment numbers. 

The mid-term elections resulted in the Republicans gaining control of the House of Representatives as voters voiced their opinion as to the dissatisfaction with the current administration’s policies. This expected result brought hope that change in government may lead to better ideas and policies surrounding the chief concerns of the economy, unemployment and government spending. 

The second highly anticipated event was the news of the Federal Reserve’s decision on interest rates and a possible second round of quantitative easing (QE2). The investing community was intently interested on what the Fed had to say regarding their stance on inflation and how they would balance that with possible interest rate increases. The Fed stated that they did not see the fear of inflation starting to increase and thus suggested that they were not expecting an increase in interest rates soon. They also announced that as part of QE2 they would begin to buy $600 billion of long-term government bonds over the next 6-8 months. By doing this, the Fed is keeping interest rates low in the hopes that banks will lend more, consumers will borrow more and companies will be able to borrow cheaply to increase spending and create jobs.  

The third piece of news was that the economy picked up 151,000 new jobs in October. This was more than double the expected gain. Although the unemployment rate still stands at 9.6% and initial jobless claims rose for the month, an increase in new jobs could be a sign that the unemployment rate may begin to decline.

The resulting market gains that ensued were a bit surprising to me as I thought the market had anticipated and already priced in all of those scenarios. I fully expected a “sell on the news” mentality and was happily surprised as to the strength of the market rally that we saw. Although I believe we will see some sort of short term pullback in the markets, I am more optimistic that with unemployment data starting to improve, a better balance in the government and the Federal Reserve willing to do seemingly whatever it takes to provide liquidity to the market, we can look forward to an improving, albeit slow, economy. This should in turn lead to a less volatile and improving stock market into 2011. 

I again stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.

Jason M. Vavra

jvavra@vavracapital.com

Disclaimer

The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.