Innovest's September 2009 Market Commentary

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The Economy

The month of September marked the one-year anniversary of the Lehman Brothers bankruptcy, which resulted in the collapse of global capital markets. In contrast, September of this year offered the good news of improving economic data and several merger and acquisition deals. Walt Disney Co. announced the purchase of Marvel Entertainment for $4 billion, and  General Motors agreed to sell a majority stake in its Opel unit to Magna International and OAO Sberbank. Meanwhile, year-over-year declines in corporate revenues were largely offset by cost cutting measures and better than expected profits. Several emerging economies reported improving economic results, including Brazil’s emergence from recession in the second quarter. However, Russia’s economy shrank 10.9%, after substantial drops in capital investments and industrial production. The U.S. unemployment rate climbed to 9.8%, the highest level since 1983. Although the pace of job losses has slowed, hiring continues to remain idle. Moreover, many economists contend that the real jobless rate remains much higher since many workers have exhausted their unemployment benefits.

The Federal Reserve Board extended its program to buy mortgage-backed securities through March 2010, after having purchased nearly $850 billion thus far. The Fed continues to keep short-term rates low with no expected rate hikes until sometime in 2010 (or possibly later). With a significantly expanded balance sheet, the Fed may be setting the stage for an inflationary environment if they fail to effectively and timely execute an exit strategy. However, for now, inflationary expectations remain muted as velocity of money is low, the economy has ample slack and upward wage pressures remain non-existent. Lastly, the Institute for Supply Management’s manufacturing gauge remained above 50 for the month of September, indicating economic expansion. Recent growth in inventories has come from pent-up demand and corporations having cut inventories sharply to manage costs.

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