Economy: November 2009 Archives

According to the National Retail Federation (NRF), the holiday shopping season is off to a lukewarm start.  While there were more shoppers in stores over the past three days, they spent less money than in the past.

The NRF found that 195 million people visited stores or websites over the Thanksgiving holiday and the associated weekend.  That is up from 172 million last year.  However, overall spending dropped to $343 from $373 last year.  Total spending over the weekend is estimated at $41.2 billion.

In comments accompanying the release of the data, the NRF said that consumers were seeking low prices and that big sellers over the first weekend of the holiday shopping season were lower cost items like small appliances, toys, and winter clothes.  Retailers "have their work cut out for them to keep people coming back through Christmas."

The destination of choice for shoppers seemed to be department stores.  Over the weekend, nearly half (49 percent) of all shoppers visited these stores, up 13 percent from last year.  Other places that people visited were electronic stores, clothing stores, and grocery stores.  The percentages of people visiting those stores were 29 percent, 23 percent, and 20 percent, respectively.

The most popular purchases were for clothing, books, and toys.  Sporting goods, personal care and beauty items, and gift cards saw increases in the percentages of people who purchased them from last year.

Analysts said that caution prevails among shoppers.  Whether it's online or in stores, the pie is unlikely to grow, they said.

It is important to remember that the kickoff weekend doesn't necessarily correlate with results from the rest of the holiday shopping season.  Last year, for example, sales for the weekend were off by one percent.  However, sales for the holiday season dropped by 6.3 percent according to MasterCard.

Despite this, retailers like to use the Thanksgiving weekend to get shoppers into their stores.  They're especially interested in getting shoppers to spend early so that they can book that revenue this year, with continued uncertainty over the consumer's willingness to spend.  There are signs that shoppers are sticking to lists and budgets.  So, stores are using discounts to lure them in.  However, unlike last year, when the near collapse of the financial system took retailers by surprise, this year, through tighter inventory control and planned discounts, retailers should be able to profit even from highly discounted items.

Analysts say that waiting until the last minute, which worked well for shoppers last year as retailers were desperate to clear out excess inventory, is unlikely to be a winning strategy this year.  Tighter inventory control will reduce the need for fire sale prices to move inventory, analysts said.

In an economy with double digit unemployment, it's unlikely that shoppers will really open up their wallets.  Thus, investors in retail stocks, which have seen a huge run up, should be as cautious as shoppers have been thus far this holiday season.

Charlie Rose recently interviewed Warren Buffett on his show.  The wide ranging interview covered topics ranging from Buffett's recent acquisition of Burlington Northern Santa Fe, the response to the financial crisis, the budget deficit, China's emergence as an economic power, tax policy, and more.

Here are some highlights.

On his purchase of the remainder of Burlington Northern Santa Fe that his holding company, Berkshire Hathaway, doesn't already own:

I felt it was an opportunity to buy a business that is going to be around for 100 or 200 years, that's interwoven with the American economy in a way that if the economy prospers, the business will prosper.  It is the most efficient way of moving goods in the country.  [I]t moves a ton of goods 470 miles on one gallon of diesel.  [A] train replaces 280 trucks on the road.  It emits far less into the atmosphere that's damaging than trucking.

On what he's seeking for in his investments:

Reasonable return is good enough, Charlie.  I mean, 50 years ago, I was looking for spectacular returns, but I can't...get them.  We have...eight to ten billion to invest every year.  [When] we're building things that are essential to society...they really don't have any choice...and we should get a decent return on that.  Enough to encourage us to keep putting money in the business, but we're not entitled to spectacular returns.

On cash as an investment:

[C]ash is always a bad investment.  I mean, when people say cash is king...that's crazy.  Cash [is] sure to go down in value over time.  You don't need to have excessive amounts of it around.

On the financial crisis of last year and its effects on the economy:

Because we're in a recession, there's not as much demand for money, and money isn't flowing to really dumb projects like it was a few years ago. But money is available now.  And the panic is gone.  But that panic that spilled over into the real economy last fall...has...left real scars on the American public psyche.  The American economy will come back.  It won't be tomorrow...and it won't be exactly the same.  Businesses will expand.

On China's growing economy and its potential to replace the United States as the world's largest economy:

They have four times as many people as we do...they will have a larger economy.  You know, they will grow faster than we will grow, but they're starting from a much lower base.  I mean, you know, I'll meet some guy in the street today whose net worth will be growing faster than mine on a percentage basis, but if I start with a big enough number, it will be a while before they catch me.

On the deficit:

[Congress], once the economy is rolling again...they've got to raise taxes now that income will go up as the recession ends anyway.  They're going to have to close the gap between expenditures.  The gap between [expenditures and revenue] is wider as a percentage of GDP than we've seen except in wartime.  If we have a gap of two, 2.5 percent and we have sort of normal growth, then debt as a percentage of GDP doesn't grow.  So, the country gets more valuable over time and we have more productive capacity and all.  So we can handle more debt, but...it should be proportional to...the wealth and earnings of the country.

On taxation and marginal tax rates:

I don't...like [a value added tax because]...it's regressive and you know, we don't need any more regressive taxes in the United States.  And I worked with the rich people...even when the top rate was 70 percent.  I worked with them when capital gains rates were 39.6 percent and not one of them said, you know, it's 1:00, and instead of working this afternoon I think I'll go to the movies because my marginal rate is so high.  I mean, if anything, they worked harder.

[T]axation is a way where you get to the excesses of what the market system produces and where you take care of the people who get the short straws

On income inequality:

[Y]ou want a prosperous country so you want a whole bunch of rich people, but you also want everybody to do reasonably well in something as prosperous as we have.  We have $45,000 of per capita GDP in the United States...but we've got almost 60 million people living in households where...the top income is $21,000 or less.  But a prosperous country should not just be prosperous for the people like me.  I'm prosperous because of the society around me.

There's a lot more, and it's well worth listening to the entire interview.  Consider this -- every year, Buffett auctions off a chance to have lunch with him, with the proceeds going to charity.  Earlier this year, that lunch cost the winner $1.68 million.

You'd get a chance to chat with Buffett for about an hour at that lunch.

If you don't have the coin to buy that lunch, you can watch the interview with Charlie Rose for $1.68 million less.

By now, you're sick of the financial press talking about Black Friday.  This is, of course, the day after Thanksgiving.  The name of the day supposedly came about because that is the day when retailers go from being in the red to being in the black for the year.

Of course, that's nonsense.  Most retailers now have earnings, not losses, in the quarters before Black Friday.

Another thing you'll hear is how critical Black Friday is for retailers.  Without strong sales on this day, you'll hear, the holiday shopping season will be weak.

According to some analysts, sales are probably meeting or exceeding expectations.  The National Retail Federation said that heavy promotions drove strong consumer traffic.  There are reports of individuals waiting as long as 20 hours in order to take advantage of discounts.

And traffic at malls run by Taubman Centers was up by about ten percent versus last year, the company said.

However, the lines were driven by customers seeking deep discounts.  Obviously, deep discounts yield lower profits for retailers.  While we likely won't see the discounts that we saw last year, where companies like Saks cut their prices by as much as 60 percent and offered extra points to its most loyal customers.

Still, for all the hype about Black Friday, the day isn't even the most busy shopping day.  That day is usually the last Saturday before Christmas.  And an analysis done for the Washington Post by a retail analyst found that there's very little correlation between Black Friday sales and the overall holiday season.

So, investors would be well advised to not listen to the hype about Black Friday.  It's one day in a long holiday shopping season, and a lot can happen between now and Christmas.

Many investors probably thought that the global financial crisis that the world suffered through during the end of last year and early this year had been solved.  Others warned that there was another shoe to drop.

The Dubai crisis, which analysts at Bank of America said may escalate into a "major sovereign default," serves as a reminder that while a total collapse of the world's financial system has been averted, many risks remain.

"One cannot rule out -- as a tail risk -- a case where this would escalate into a major sovereign default problem, which would then resonate across global emerging markets in the same way that Argentina did in the early 2000s or Russia in the late 1990s," Bank of America analysts wrote in a report to clients.  They added that Dubai defaulting on its debt would be a "major step back" in the recovery from the global financial crisis and would result in a "sudden stop of capital flows into emerging markets."

Dubai borrowed $80 billion over a four year period to build itself into a tourism and financial hub.  It was known for "outrageous" construction projects which even prompted AskMen to compile a list of the Top Ten Outrageous Dubai Construction Projects.

However, just like a real estate speculator in Las Vegas, Dubai has been pounded by the downturn in real estate.  It has suffered through a 50 percent drop in real estate prices from their 2008 peak.  By comparison, Las Vegas, the worst housing market in the United States, had a 55 percent price drop.  However, unlike Dubai, that drop came over a 37 month period versus a single year.

Bank of America said that 'in a best-case scenario, this will remain limited to a Dubai corporate sector problem, with either some bailout from UAE authorities or a market-friendly debt restructuring."  They estimated that Dubai's external debt is 103 percent of its GDP.

Not surprisingly, stocks plunged on the news.  The Dow was off as much as 233 points before recovering to close down by 154 points, or 1.5 percent at 10,310.  The S&P 500 fell 1.7 percent to 1,091.  And the Nasdaq dropped by 1.7 percent to 2,138.

For the week, the Dow dropped by 0.1 percent.  The S&P 500 was actually up by 0.01 percent for the week.  And the Nasdaq closed the week down by 0.4 percent.

Investors will need to watch what happens with Dubai and its debt issues over the weekend.  A positive resolution, or signs of one, will likely cause a rally. On the other hand, if the problems drag on, it is likely that stocks will react negatively to the news.

The dining room table wasn't the only table full of things for investors to feast on.  On Wednesday, investors got a feast of economic data.  Data was released on consumer sentiment, initial jobless claims, new home sales, personal income, and durable goods.

Initial unemployment claims for the week were down by 35,000 to 466,000.  This was the lowest level in more than a year and the best report since September of 2008.  Continuing claims also dropped by 190,000, down to 5.42 million.  The last time there were fewer initial claims was the week of September 13, 2008, when 459,000 filed initial claims for unemployment.

Only one state, Florida, reported an increase of more than 1,000 claims.  That was countered by the 22 states that reported a drop of more than 1,000 claims.  The list of states that had a decrease of more than 1,000 claims was led by California, where nearly 8,000 fewer claims were filed than in the week before.  However, that positive news was tempered by news that a shorter workweek drove down California's claims.

Analysts had expected initial unemployment claims to drop to 500,000, so the news was much better than expected.  Estimates ranged from 460,000 to to 512,000, so the actual number came in close to the most optimistic estimate for initial claims.

The unemployment data, according to analysts, shows an improving trend.  Employers are shedding jobs at a slower rate but they have not yet returned to increasing their headcount.

Personal incomes gave investors an additional helping of positive economic news.  The government reported that personal income increased by 0.2 percent and personal spending increased by 0.7 percent.  The savings rate declined to 4.4 percent, down from 4.6 percent in September.

Analysts had expected personal income to increase by 0.1 percent and personal spending to increase by 0.5 percent.  Thus, the increase in both spending and income was better than expected, and a positive sign for the economy.

New home sales also increased, with sales increasing by 6.2 percent to an annual rate of 430,000.  That pace was the highest rate of new home sales since September 2008.  Analysts had expected that new home sales would climb to 402,000, with estimates ranging from 350,000 to 425,000.  Thus, the actual number of new homes sold climbed above even the most optimistic estimates.

Some of the increase in sales may have come as home buyers hurried to take advantage of the $8,000 tax credit for first time home buyers that was set to expire at the end of November.  However, that credit has since been extended.  It is possible that the sales that were pulled forward will cause sales to drop in the next few months.

However, as has been the case recently, the good economic news was tempered.  First, durable goods orders plunged unexpectedly by 0.6 percent.  This was the second decrease in three months.  Excluding the volatile transportation sector, orders dropped by 1.3 percent.  Without defense related goods, durable goods orders rose by 0.4 percent.

The report was seen by analysts as reflecting a reluctance on the part of companies to make capital investments.  Companies are hesitant to spend money on new equipment because they are concerned that high unemployment levels will cause consumers to pull back on spending.

Thus, the drop in the University of Michigan's consumer sentiment index, which showed a decrease to 67.4 from the prior month's 70.6, is a cause for concern.  According to the director of the survey, ""Consumers cite their deteriorating finances as well as their uncertainty about future job and income prospects more than ever before, and this has made them very cautious spenders."

The survey revealed that consumers are extremely pessimistic about their income.  Only nine percent of the respondents reported an increase in their personal incomes, and 38 percent said that a cut in their income was their biggest concern.  What is even more concerning is that very few respondents anticipate income gains and those that are expect small gains.

This naturally had a serious impact on planned spending.  When asked about the purchase of durable goods such as furniture, appliances, and home electronics, 39 percent said they will postpone their purchase of these items.  That was only beat by the 47 percent who said this in the November 2008 survey, which was the worst on record.

The consumer sentiment index caused analysts to say that the consumer is a long way away from being a major contributor to growth in the economy.  It is likely that until the labor market improves, consumer spending, which accounts for 70 percent of the economy, will remain weak. That means we will see a weaker than normal recovery.

The National Association of Realtors reported today that existing home sales jumped by 10.1 percent, to a seasonally adjusted annual rate of 6.1 million units.  That is 23.5 percent higher than the October 2008 figure of 4.9 million homes, and is the highest number of sales since February of 2007.

The gain in sales took analysts by surprise.  Analysts had expected existing home sales to climb to an annual rate of 5.7 million, with estimates ranging from 5.2 to six million.  So, the actual figure came in even higher than the most optimistic analyst.

The increase took even the National Association of Realtors by surprise.  The normally overly optimistic organization said that the gains may have been driven in part by the anticipated expiration of the $8,000 tax credit for first time home buyers.  Now that the credit has been extended and expanded, the organization said, "a measurable decline should be anticipated in December and early next year before another surge in spring and early summer."

As you know, the downturn in the housing market helped start the economy on the path towards the worst recession since the Great Depression.  A recovery in the housing market would go a long way towards pushing the economy back into growth.

Analysts say that the housing market is showing signs of a rebound.  The jump in existing home sales was called a sign that there is a lot of demand in the housing market.  Barclay's Capital called the gain "impressive" and said that "the housing market recovery will be a durable one."

The National Association of Realtors concurred.  "Existing home sales have already bottomed. Home prices are almost there. We are seeing a less of a decline in house values," the organization's chief economist said.

Cabot Money Management said that the home sales numbers were a sign that it was a "relief" that the "tax benefits going into the housing market are working."  They added that "everything is about housing and jobs right now."

So, the week opened up on a good economic note, and stocks will likely move up.  Stocks of home building companies like D.R. Horton and KB Homes are likely to jump.  Now the question is whether the rest of the week's economic data on GDP, consumer confidence, durable goods, consumer spending, new home sales, and jobs.  It is a short week with the Thanksgiving holiday, but it's going to be full of economic data that will move markets.

The Labor Department reported today that state unemployment rates were "generally little changed or higher in October."  In 29 states and the District of Columbia, the unemployment rate increased.  On the positive side, 13 states saw a decline in their unemployment rate, and eight states showed no change.

The overall unemployment rate for the country as a whole was 10.2 percent.  There were nine states with unemployment rates that were higher by statistically significant amounts, led by Michigan's 15.1 percent.  On the other hand, 31 states had unemployment rates that were lower by statistically significant amounts, with North Dakota's 4.2 percent unemployment rate the best.

In 28 states, non-farm payrolls increased in October.  There were 21 states with decreases in payrolls, and one state showed no change.  Texas had the largest gain in payrolls, with Michigan showing the highest percentage gain.  New York showed the largest drop in payrolls, and Wyoming showed the highest percentage loss in jobs.

And job seekers are unlikely to find the jobs picture getting any better in the near future.  According to Economy.com, the unemployment rate is likely to rise until early next year.  As usual, employers will not start hiring again until they are convinced that the recovery is underway and the new employees they hire will have work to do.

Fed Chairman Ben Bernanke said of the labor market that "the best thing we can say about the labor market right now is that it may be getting worse more slowly,"  This problem threatens the recovery underway.  Until consumers are convinced that the job market is getting better, they'll restrict their spending.  With consumer spending accounting for 70 percent of the economy, until those wallets get opened up, the recovery will remain weak.

Given these conditions, investors may want to consider whether some stocks that depend on consumer spending, such as retailers, have come too far too fast.

In what can be viewed as a sign that the labor market is improving, the Labor Department reported today that initial unemployment claims were steady last week at 505,000.  Continuing claims decreased by 39,000 to 5.61 million.  The initial claims number is the lowest in ten months, showing that the pace of layoffs has started to slow down.

Only one state, Florida, showed an decrease of more than 1,000 claims, with 1,915 fewer people filing initial claims in Florida.  On the other hand, 18 states showed an increase in claims of more than 1,000, led by Michigan's 6,001 increase.

Economists had expected an increase of 2,000 in initial claims, with estimates ranging from 485,000 claims to 550,000 claims.

While the labor market is showing signs of life, the pace at which it is improving has been called "glacial" by analysts.  Still the good news is that as consumers start to spend, companies will likely ease their pace of layoffs even more.  However, a rebound in hiring is unlikely to materialize quickly, as employers can add more hours of work to their current employees schedules with the average workweek only 33 hours.

Analysts at JP Morgan Chase said that the trend downward in initial claims shows that "job losses could start to moderate again soon."  Their report said that this is a "positive sign."

As you know, jobs lag any economic recovery, as employers always remain reluctant to increase employment until they are sure that a recovery is underway.  However, the flattening out of initial claims and the drop in continuing claims may be an indication that employers are moving slowly towards increasing their payrolls.

Investors got additional information to digest this morning, as the Commerce Department released information on new housing starts and the consumer price index.

Housing starts plunged by 10.6 percent in October, to a seasonally adjusted 529,000.  Not only is that figure much lower than the September figure, but it is 30.7 percent lower than the rate from October 2008.  In addition, the number of building permit fell by 4.0 percent to 552,000 in October.  That number is 24.3 percent down from October 2008.

Analysts had expected housing starts to come in at 600,000, so the number of starts was way below the consensus.  Estimates ranged from 570,000 to 630,000, thus, the actual number was way below even the worst estimate.

While the drop in housing starts was a big surprise, analysts said that many builders increased their construction earlier this year so that they could take advantage of the $8,000 tax credit for first time buyers.  That credit was scheduled to expire at the end of this month, so they held off on new construction.  Now, since another credit has been put in place, builders may resume the higher pace of construction we saw earlier this year.  Some builders such as Toll Brothers have expressed optimism for the housing market.

Inflation doesn't appear to be on the horizon, which means that the Fed will be able to keep interest rates at unprecedented lows.  The consumer price index increased by 0.3 percent in October.  For the twelve months ending in October, the CPI declined by 0.2 percent.

Energy was the big driver of the increase, with prices for gasoline, fuel oil, natural gas, and electricity all increasing.  That drove the energy component of the CPI up by 1.5 percent.  The food part of the index also increased by 0.1 percent after declining in two out of the three previous months.

The core CPI, which excludes the volatile food and energy components of the index, was up by 0.2 percent.

Analysts had expected the CPI to increase by 0.2 percent and the core CPI to increase by 0.1 percent.  The range of estimates for CPI ranged from a decline of 0.2 percent to an increase of 0.5 percent.

Even though the CPI numbers were slightly higher than the consensus estimate, they show that inflation is still in check.  The combination of high unemployment and flat wages, analysts say, hampers the ability of companies to increase prices.  Nor do they have to, as cost cuts and increases in efficiency are allowing them to generate more profits for each dollar of sales.

The CPI report gives credence to Fed Chairman Ben Bernanke's conclusion that "inflation seems likely to remain subdued for some time."  This is good news, because it means that the Fed will not have to raise interest rates to fight inflation while the recovery is still weak.

All told, the economic news shows that while the economy is returning to growth, it's not out of the woods yet.  The housing numbers show that the base for a strong recovery is not in place.  But the inflation numbers are good news.

A report released today calls into question the actions taken by the New York Fed during the time that AIG was being bailed out by the government.  The Special Inspector General (SIG) of the TARP was asked by Congress to look into what the actions of the government with regard to AIG.  Specifically, Congress requested that the decision making process be examined, a determination be made as to why AIG's counterparties were paid at par, and what exposure to credit default swaps remains on AIG's books.

As you know, and as the report says, in the fall of 2008, AIG was facing a liquidity crisis.  Attempts to find financing from the private sector were unsuccessful, and in the end, the New York Fed and Treasury decided to provide financial support to AIG instead of letting it file for chapter 11.  There was concern that if AIG failed, "key sectors" of the financial system, "such as retirement accounts and the credit market," would be harmed.

Initially, the government injected capital into AIG, which came with a high interest rate.  However, when it became clear that AIG's liquidity problem would not be solved by the injection of capital and another downgrade to the company's credit rating was imminent, the government decided to step in and buy the underlying assets on which AIG had sold credit default swaps.  By purchasing the underlying assets, the government effectively wiped out any liability AIG had to its counterparties, because now the only counterparty was the government.

According to the SIG, the government made "limited efforts" to negotiate concessions.  However, when the government encountered resistance, it decided to pay the counterparties at par.  The government felt that its ability to negotiate would be hampered by a number of factors.  One of the biggest was that since the threat of bankruptcy had been eliminated by the government's rescue action, government negotiators felt they had lost leverage.

The SIG concluded that the government made several decisions that "severely limited" its ability to extract concessions.  First, it decided that it would treat all the counterparties the same and that foreign banks would not be treated differently than domestic banks.  This made it next to impossible to get concessions, as the French government refused to allow two of its banks to accept concessions.  Second, this gave effective veto power to any one of the counterparties.

The government also let AIG's counterparties know that participation in the negotiations was voluntary.  As a regulator of the entities that held AIG's credit default swaps, the government did not want to be seen as using a heavy hand.

In the end, the decisions of the government potentially resulted in significantly more being paid to AIG's counterparties than necessary.  Members of the government who were involved in the decision defended their actions.  Treasury secretary Timothy Geithner, who was the president of the New York Fed at the time when the bailout of AIG was taking place, said "you're going to see a lot of conviction in this, a lot of strong views -- a lot of it untainted by experience."

However, all is not lost.  AIG owes the government $19.3 billion for the underlying assets that were taken off the hands of its counterparties.  The current market value of those underlying assets is $23.5 billion.

So, despite what happened, it is possible that the government may make money on the AIG bailout.  Nevertheless, the government needs to learn from this incident and not make the same mistake if something like this happens again.

The Commerce Department reported today that retail sales increased by 1.4 percent in October.  The increase in sales was driven in large part by a rebound in the automotive sector, which saw a big drop in September due to the expiration of the cash for clunkers program.  The automotive sector saw a surge in sales of 7.4 percent.  September's number was revised downwards, from a drop of 1.5 percent to a drop of 2.3 percent.

Excluding auto sales, retail sales climbed by 0.2 percent.  Gains were seen in many sectors, led by food service and drinking establishment, non-store retail, and miscellaneous store sectors.  Losses were led by the building materials and garden equipment, sporting goods, and furniture sectors.

The consensus estimate was for an increase of 0.9 percent, with projections ranging from a gain of 0.4 percent to 1.8 percent.  Thus, the number was on the optimistic side of projections.

Analysts said that the October numbers showed that the consumer is showing some resilience in the face of high unemployment.  With the labor market so weak, they said, October's retail sales numbers are about as good as can be expected.

One of the beneficiaries of the big increase in auto sales was General Motors.  The company reported a loss of $1.15 billion.  The company also showed positive net cash flow, reporting $3.3 billion in cash flow excluding items in its first report since emerging from bankruptcy in July.  In the same quarter from last year, GM reported a loss of $2.5 billion and burned $6.9 billion in cash.

The improvement in results will allow GM to accelerate its repayment of government loans to the United States and Canada.

Much of the improvement was due to cost cuts.  GM's structural costs dropped to $9.1 billion from $22 billion before the company filed for chapter 11.  These cost cuts allowed the company to offset the drop in sales it saw, with global market share dropping from 13 percent in the same period last year to 11.9 percent.

GM still faces challenges.  As the CEO of the company said, "with a healthier balance sheet and a competitive cost structure, our focus is on driving top line performance."  Until that top line performance improves, GM will face challenges.  But, it looks like the taxpayer's investment in the company will pay off.

Investors got a shot of bad news yesterday, as the University of Michigan unexpectedly fell to a three month low of 66.  The index came in at 70.6 in October.  The consensus estimate for the index was for an increase to 71, with estimates ranging from 67.5 to 75.  By comparison, during the economic expansion that ran from 2001 to 2007, the index averaged 89.2.

Analysts said that the consumer sentiment number is a warning sign for those expecting a robust recovery from the worst downturn since the Great Depression.  In its early stages, they say, the recovery will be led by manufacturing and exports, as economies in developing nations are returning to growth much more quickly than those of developed nations.

High unemployment is the biggest challenge to the U.S. economy, the largest in the world.  With unemployment expected to remain above 10 percent through the first half of next year, and that will keep consumer spending down.  With consumer spending accounting for two thirds of the economy, without the consumer opening up his wallet, growth will remain lukewarm.

Still, retailers, who rely on consumer spending to drive their profits, are somewhat optimistic about the holiday season that's about to get underway.  Macy's, for example, reported a loss in third quarter sales.  But, their CFO said that they are "cautiously optimistic" about the holiday season.  They cautioned, however, that there is "more uncertainty" than is normal in the retail environment.

Despite this, stocks rose on Friday, propelling them to their second consecutive weekly gain.  The Dow rose by 0.7 percent to 10,270.  The S&P 500 climbed by 0.6 percent to 1,093.  And the Nasdaq increased by 0.9 to 2,168.  For the week, the Dow was up by 2.5 percent, the S&P 500 2.3 percent, and the Nasdaq 2.6 percent.

The markets rallying despite the worse than expected news on consumer sentiment is a sign that the markets want to run.  Investors, while they should always remain cautious, should seek to take advantage of this trend.  As they say, the trend is your friend.

In a sign that things may be getting better in two critical aspects of the economy, the number of initial unemployment claims filed dropped more than expected and foreclosures declined for the third month in a row.

The Labor Department reported that the number of initial unemployment claims filed dropped by 12,000 to 502,000.  That is the lowest level of initial claims since January. Continuing claims also fell, dropping by 139,000 to 5.63 million from last weeks 5.77 million figure.

Analysts had projected that 510,000 people would file initial claims, with estimates ranging from 495,000 to 525,000.

Seven states showed a decline in claims of more than 1,000, led by California's decrease of 6,752 claims.  On the downside, four states showed an increase of more than 1,000 claims, with Wisconsin's increase of 1,501 the worst.

Analysts said that the latest data is another sign that companies are already at very low staffing levels and do not have much more room to cut jobs.  However, they warn, with the average work week at only 33 hours, employers will not have to start hiring at a rapid pace.  They can add hours to the schedule of their current employees before they have to start hiring new ones.  "We're not getting a strong enough vote of confidence yet from claims to say companies have stepped up their hiring and greatly reduced their pace of layoffs" is how one analyst at Credit Suisse put it.

Still, economists at JPMorgan Chase said that initial claims levels around 500,000 are consistent with stable payrolls.  And other economists said that the economy is reaching the point where stabilization in jobs can be expected, with a swing to rising employment following.

In another positive sign for the economy, the number of foreclosures fell for the third month in a row.  RealtyTrac reported that foreclosed properties fell to 332,292 in October, a decline of three percent from the month before.  However, they cautioned, the number of foreclosures is still up by 19 percent from the prior year.

In comments accompanying the release of the data, the CEO of RealtyTrac said that decline in foreclosures for three months in a row was "unprecedented" and may be a sign that "the foreclosure tide may be turning."  However, he warned, the combination of negative equity, high unemployment, and high risk mortgages "continue to loom" over the housing market.

The same markets that have seen the most foreclosures continued to lead the list.  Nevada, California, and Florida were the states with the most foreclosures.  In Nevada, a whopping one in 80 properties is in some stage of the foreclosure process.  That is nearly double the rate of California's one in 156 homes and more than double Florida's one in 168 homes.

All of the top ten metro areas for foreclosures are in those three states.  Las Vegas, where an incredible one in 68 homes -- more than five times the national average -- is in some stage of foreclosure, led the country.  California claimed seven of the ten leaders in this category, with Florida taking two of them.

Still, while the news is far from good, there are signs of improvement.  With the steep plunge that the labor and housing markets took, we cannot expect a rapid recovery.  The patient is off life support, but he's still in the hospital.

Confidence in the global economy slipped, according to a survey of over 1,500 professional investors surveyed by Bloomberg.  The cause?

Central banks around the world are starting to withdraw some of the extraordinary stimulus measures put in place in response to the financial crisis last year.

The professional global confidence index dropped from 61.7 in October to 60.3.  October's number was the highest that's been seen since the index was rolled out two years ago.  Despite the dip, however, the index exceeded 50 for the fourth month in a row.  That indicates financial professionals are still optimistic about the global economy.

The drop came as many central banks around the world are starting to pull back on the emergency measures they rolled out in order to avoid bubbles like the one that inflated in housing recently.  Financial professionals are concerned that at a time where unemployment is still rising in many countries, pulling back on these measures will remove support from the economy at a time where consumers are still holding on to their wallets.

In the United States, which is the world's biggest economy, analysts are concerned that with unemployment rising, GDP growth will slow or perhaps slip into negative territory.  Some view the recent growth in GDP as a short term pop due to stimulus spending by the government.  With unemployment continuing to rise, they argue, once the stimulus spending ends, the economy will turn down again.

Even in countries that have weathered the economic storm better than others, like Brazil, many have concerns.  The index for South American financial professionals dropped from 72.9 to 66.5.  And in Brazil, the region's biggest economy, the index fell to 86 from 88.3.

Central banks around the world are in a difficult situation.  They can't let asset bubbles inflate, or we'll be right back to what happened when the housing bubble popped.  And they've got to spur growth, because the economy is still on shaky ground.

Whether they'll be able to balance these two concerns remains to be seen.

Yesterday, good economic data pushed stocks higher, with the Dow closing above 10,000.  Today, the markets are likely to give up some of those gains as the news on the jobs front was worse than expected.

The Labor Department reported that employers shed 190,000 jobs in the month of October and the unemployment rate climbed to 10.2 percent.  The drop in employment was led by construction, where employers shed 62,000 jobs.  Manufacturing also saw big cuts in employment, with 61,000 less people on the payroll.  Another sector which led employment down was the retail sector, where 40,000 jobs were cut.

Since the recession began in December 2007, employers have cut 7.3 million jobs.  Not surprisingly, job losses have been extensive in the construction and manufacturing sectors.  These two sectors combined for 3.7 million job cuts, or more than half of the total job losses.

Health care jobs continued to increase, climbing by 29,000.  This is one sector that has shown job gains during the recession, with a total of 597,000 jobs added since the recession began.

In what is perhaps the only silver lining in a very big cloud, temporary employment increased by 44,000.  Employers often add temporary workers when they believe business conditions are starting to improve but they want to be sure that a recovery will continue before bringing on permanent workers.

However, average hours worked remained constant at 33.0 hours.  Factory workers increased their hours worked to 40.0, and the average number of overtime hours was 0.2.  This is a counterpoint to the temporary workers number, since employers work their current employees more before they bring on new help.

Analysts had expected a drop in payrolls of 175,000, with some saying that the bigger than expected drop in the number of initial unemployment claims yesterday was a sign that the payrolls number would be better than expected.  Estimates ranged from a drop of 250,000 jobs to a decline of 105,000.  The unemployment rate was projected at 9.9 percent, with estimates ranging from 9.8 percent to 10.1 percent.

The continued weak labor market is one of the reason why the Fed feels that it can keep interest rates at record lows for an "extended period."  Analysts said that the unemployment numbers are ugly and that it is very disappointing to see such a high level of unemployment this early in the recovery. 

While jobs are normally a lagging indicator, some say that until the employment picture improves, there can be no sustained recovery.  They say that with so much of the economy dependent on consumer spending, and consumers likely to hold their wallets tightly until the jobs picture improves, any recovery is going to be weak.

After receiving good news on jobs, productivity, and retail sales, stocks climbed.  The Dow climbed back above the psychologically important 10,000 level.  Traders are optimistic as they await payroll data for the month of October, which will be released at before the markets open on November 6.

All of the major indices climbed.  The Dow, as noted, climbed 2.1 percent to close at 10,006, with all 30 of its components closing higher.  Cisco rose by 2.8 percent after its CEO had positive comments on tech spending and the economy as a whole.  The S&P 500 also rose, gaining 1.9 percent to close at 1,067.  And the tech heavy Nasdaq did the best of all, climbing by 2.4 percent to 2,105.  That was the best gain seen by the Nasdaq since July.

Investors viewed the news that initial unemployment claims fell to their lowest level since March as a sign that the labor market is improving, even though hiring has yet to resume.  Also boosting stocks was news from the International Council of Shopping Centers and Goldman Sachs that retailers showed a sales increase for the second month in a row after a long string of declines.

Positive comments on banks from the analyst who recommended selling Lehman Brothers four months before it filed for chapter 11 helped boost financials.  According to Richard Bove, the risk of default is much lower now since banks have raised the amount of cash on their balance sheets.  Bove added that banks could possibly double in price, since the levels they are trading at now are not that high compared to where they've fallen from.

The focus now shifts to October payrolls.  Some analysts believe that the good news on initial unemployment claims means that the October payroll numbers will be better than expected.  If that is the case, and the data indicates an improving labor market, it is likely we will see stocks close the week out on a positive note.

Investors got a triple shot of good economic news this morning.

The Labor Department reported that initial unemployment claims dropped by 20,000.  First time claims for unemployment benefits came in at 512,000 for the week ending October 31.  Continuing claims also dropped, falling by 68,000 to 5.75 million.

The consensus estimate for initial claims was 522,000, with estimates ranging from 510,000 to 535,000.  Thus, the actual number came in on the optimistic side of analyst estimates.

The news, while good, wasn't all positive.  Only two governmental bodies, Indiana and Puerto Rico, showed a drop in claims of more than 1,000.  That was countered by the 12 states that showed an increase of more than 1,000 claims, led by California's 14,394.

The drop in initial claims, however, prompted some economists to say that the recovery has taken hold and that the trend for unemployment claims is downward.  This indicates that the job market, while still weak, is strengthening.

Those who are not among the 7.2 million people who lost their jobs since the recession began in December of 2007 are doing their jobs more efficiently.  The Labor Department's productivity report showed that productivity soared at a 9.5 percent annual rate in the third quarter.  This was the biggest gain in productivity since the third quarter of 2003, when it jumped by 9.7 percent.

The gains in productivity didn't come as a result of an increase in production.  In fact, production dropped by 3.5 percent.  However, that was offset by a decrease in hours worked of 7.5 percent.  That drop in hours worked was the biggest seen by the Labor Department since it began keeping records in 1948.

Once again, productivity gains were far better than the consensus estimate of a 6.5 percent increase.  Estimates ranged from 3.8 percent to 8.5 percent.  Thus, the actual number came in way above even the most optimistic estimate.

The gain in productivity is seen as allowing the Fed to keep interest rates at record low levels, since it means that inflation is unlikely to rear its ugly head.  It also means that it's likely that employers will have to resume hiring soon, because they are close to getting as much as they can out of their employees.  Further, it's likely that company profits will continue to grow, as they're able to generate the same amount of revenue while spending less.

Finally, retail sales figures from a number of chain stores showed some improvement in the month of October.  October is normally a weak time period for retailers, as it falls in between the back to school and critical holiday season.  However, cooler than normal weather and some demand on the part of the consumer combined to cause sales to increase by about two percent.

Teen focused retailers like Abercrombie & Fitch and American Eagle Outfitters posted sales declines.  But even there, some retailers, such as the Buckle and Aeropostale were able to increase their sales.  Not surprisingly, with consumer spending remaining weak, discounters like BJ's Wholesale Club and Costco posted gains.

Department stores were mixed, with companies like Macy's and J.C. Penney showing declines in sales.  But Nordstrom posted a better than expected gain and Kohl's, while reporting worse than expected results, showed a gain as well.

Overall, the news was good, and the markets reacted to this in early trading, with all of the major indices up.

Investors were closely watching the Federal Reserve today, looking to see whether the statement accompanying the decision on interest rates contained a phrase about keeping interest rates exceptionally low for a while. 

They got what they wanted, as the Fed said "the Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Investors were looking for that phrase "extended period." They got it, and markets rallied after the Fed released the text of its decision.  The Dow was up by about 150 points right after the Fed's decision, but it fell off those highs and closed slightly higher.

On the day, the Dow closed up by 0.3 percent to 9,802.  The S&P 500 was basically unchanged, closing at 1,047.  And the Nasdaq fell slightly, closing at 2,056.

Financial shares plunged, causing the positive reaction to the Fed's statement to evaporate.  Shares of companies like JPMorgan Chase, Wells Fargo, and Citigroup were off by as much as three percent after news that the House would move up the effective date of credit card regulations.  And the carnage in the insurance sector was even worse.

Shares of AIG and Genworth Financial dropped by more than seven percent.  And shares of Hartford Financial Group were off by more than five percent.

Still, the news wasn't all bad.  In the release from the Fed announcing its decision to keep interest rates low, the Fed said "economic activity has continued to pick up."  They added that "the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth."

Now that investors received good news from the Fed, they'll be looking at the initial unemployment claims number and the October payrolls numbers.  These will help indicate whether the job market is continuing to stabilize, a necessary step to a strong recovery.

In a day where most investors will focus their attention on the Federal Reserve, Automatic Data Processing released its report on private sector employment.  The report showed a decline of 203,000 in private sector employment in October.  That figure is down from a revised 227,000 for the month of September.

According to the report, the rate at which payrolls are shrinking dropped for the seventh month in a row.  However, the report stated "despite recent indications that overall economic activity is stabilizing, employment, which usually trails overall economic activity, is likely to
decline for at least a few more months."

The consensus forecast for the number was for a decline in payrolls of 198,000.  And analysts at Moody's Economy.com concurred with ADP's assessment of the labor market, saying "While the economy has resumed growing, the labor market is in rough shape.  Businesses appear hesitant to boost staff until the recovery matures."  Economists predict that even though the economy returned to growth in the third quarter, unemployment will continue to rise until early next year.

The drop in payrolls was seen in both the services and the goods production sector.  The services sector shed 86,000 jobs, while the goods production sector dropped 117,000 jobs.  The drop in the goods production sector was led by a reduction of 65,000 jobs in the manufacturing sector.

Businesses of all sizes continued to cut payrolls in October.  Large employers dropped 53,000 workers and medium size companies cut 75,000.  Small businesses, in the best results since July 2008, cut their payrolls by 75,000.

While the numbers showed improvement for small businesses, there were industries that continue to get pounded.  Construction workers continued to get laid off, as the sector lost 51,000 jobs.  This drop brought the total number of construction jobs cut to 1.7 million and represented the 33rd consecutive month of declining construction employment.  The financial services sector also lost jobs, with employment dropping by 18,000.  That marked the 23rd consecutive monthly job loss in financial services.

While the ADP report was important news, all eyes will be on the Fed.  The Fed is holding its meeting to set interest rates, and while nobody expects a change in interest rates, investors will be looking at the statement from the Fed for clues on its intent.  In the prior release keeping interest rates at record lows, the Fed said "economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Investors will be looking to see if that statement is repeated or if the Fed tempers it.  Analysts say that any change in the Fed's statement will be a huge factor in evaluating risky assets.  Some advisers have told investors to move their assets into less risky ones ahead of the Fed's decision.

Legendary investor Warren Buffett agreed to the biggest acquisition in his career.  Buffett's Berkshire Hathaway inked a deal to purchase the shares of Burlington Northern Santa Fe (BNSF) that it doesn't already own for $100 a share in stock and cash.  The price represents a 21 percent premium to BNI's Monday closing price.

In a statement announcing the acquisition, Buffett said "Our country's future prosperity depends on its having an efficient and well-maintained rail system.  Conversely, America must grow and prosper for railroads to do well. Berkshire's $34 billion investment in BNSF is a huge bet on that company, CEO Matt Rose and his team, and the railroad industry."

"Most important of all, however, it's an all-in wager on the economic future of the United States," Buffett said.  He added "I love these bets."

Analysts said that Buffett's move was "Warren being Warren."  Buffett's big cash stake allowed him to move in while the market is relatively weak and while other potential bidders would possibly face problems obtaining financing.  In addition, Buffett sees BNSF as a company with competitive advantages over others in its sector.  He also sees the sector as one that has advantages over other modes of transportation.

Some analysts are concerned by Buffett's move, saying that he is paying too much for BNSF.  The $100 a share price that Buffett will pay results in a P/E ratio of 18 times projected 2010 earnings.  Competitors like CSX and Union Pacific are trading at around 13 times earnings.  And the S&P 500 as a whole, which some say is overvalued, is trading at 13.4 times earnings.

However, Bloomberg did a breakdown of just the assets that BNSF owns.  The result?  Just to replace the capital assets that BNSF owns would cost around $180 a share, so the $100 a share that Buffett is paying is well below that figure.  On top of that, BNSF is a cash generating machine, Even in a down economy, it generated $1.1 billion in free cash flow during the recently concluded third quarter.

In the end, Buffett's move is a classic move by the legendary investor.  He is taking advantage of market inefficiencies to acquire an asset at a price that he feels is a bargain and putting his huge cash stake to use.

Last week, Monday morning brought bad economic news, as consumer confidence unexpectedly declined.  That was the start of a release of mostly bad economic news for the week.

If the pattern holds, then this week will be full of good economic news.  Reports were released on construction spending, pending sales of homes, and manufacturing, and all of them were better than expected.

According to the Commerce Department, construction spending increased to $940 billion, up 0.8 percent from August's spending of $933 billion.  Private sector construction was up by 0.5 percent from August.  The gain in private construction was driven by gains in the residential sector, which climbed 3.9 percent.  Nonresidential construction actually declined by 1.8 percent.

For the public sector, construction spending increased by 1.3 percent from August.  Clearly, some stimulus money has boosted spending here, with road construction increasing by one percent.  Educational construction was essentially flat.

The gain of 0.8 percent in construction spending was the biggest since September 2008, and was well above the consensus estimate of a drop of 0.2 percent.  Estimates had ranged from a drop of one percent to flat spending, so the actual figure was well above even the most optimistic projection.

Analysts said that the unexpected growth in construction spending may have been due to a push by home builders to finish projects before the potential expiration of an $8,000 tax credit for first time home buyers.  And it's important to keep in mind that even with the unexpected growth in construction spending, it's still 13 percent below its year ago level.

And while the construction spending was driven by new homes, the news on existing homes was good as well.  Pending sales of existing homes increased for the eighth month in a row, climbing by 6.1 percent.  But even the cheerleaders at the National Association of Realtors warned people to not get carried away.  Their chief economist said "we're clearly not out of the woods because an excess of homes remains on the market despite recent improvements.  Although current inventory is getting closer to price equilibrium, foreclosures will continue to enter the pipeline."

The consensus estimate was for the number of existing home sales to remain flat, with estimates ranging from a drop of 2.5 percent and the high for a gain of 5.5 percent.  So once again, the actual number came in well above the most optimistic forecast.

Beyond the concern expressed by the National Association of Realtors, the potential expiration of the tax credit for first time home buyers is weighing heavily on analyst's minds.  Nevertheless, executives at housing related companies have stated that the housing market is nearing its bottom.

Finally, the Institute for Supply Management released its manufacturing index, which jumped to 55.7 from 52.6.  Levels above 50 indicate growth, so this indicates manufacturing is continuing to expand and is doing so at a more rapid pace.

The gain, which was the biggest since April 2006, was well above the 53.3 expected by economists.

According to Institute for Supply Management, the gains in the index were "driven by production and employment, with both registering significant gains."  New orders were the cause for the gain in production, and employment gains came as a result of some companies recalling laid off workers and the use of temporary workers.  The conclusion that can be drawn from the report is that "manufacturing is in a sustainable recovery mode."

In the survey, 13 of 18 sectors reported growth in manufacturing.  Only three reported contraction, with two flat.

All in all, today's economic data are definitely positive indicators.  Questions can be raised about the construction numbers and the existing home sales numbers since it is possible that those are being driven by the potential expiration of a tax credit.  But the manufacturing index is good news.  Of particular interest is the employment part of that index, which is showing gains.  If that continues, the long awaited recovery in the labor market may start to take hold.