January 2011 Archives

The Egyptian streets continued to erupt today, with protestors jamming public squares, the police in little-to-no control, and the army solidifying in central locations. Multinational organizations began a halt to operations in the country. Various groups called for a million marchers to hit the streets tomorrow in a pronounced show of strength. The Suez Canal, which controls a sizable proportion of global trading traffic, remained open. Despite the chaos in Egypt (and growing signs that the uprising could spread elsewhere in the Middle East), the markets were up today on encouraging economic news, particularly on consumer spending and strong earnings from ExxonMobil. For more on Egypt and the markets, see our own Brian Jacobsen’s take this morning.

The Dow gained 68 points, with 21 of its 30 components higher; the S&P 500 was up 9; and the Nasdaq rose 13. Advancers led decliners by 11 to 5 on the NYSE and by 3 to 2 on the Nasdaq. The prices of Treasuries weakened. Gold futures fell $7.20 to close at $1,334.50 an ounce, while the price of crude oil futures advanced in the wake of events in Egypt, rising 3% to settle at $92.19 a barrel.

A dismal Friday sent the major indexes lower for the week, with the S&P 500 losing 0.55%. An uprising in Egypt intensified on Friday, causing oil prices to surge and the Dow to close well below 12,000 after flirting with the mark for most of the week. Other news from overseas also affected the markets, with the United Kingdom’s economic growth reversing in the fourth quarter and raising the prospect of a double-dip recession.

The week saw President Obama’s State of the Union address, a meeting of the Fed that offered no significant changes, and release of the first estimates of fourth quarter gross domestic product. Economic growth expanded more rapidly in the fourth quarter at a rate of 3.2%, but GDP still came in under expectations. Our own Brian Jacobson thinks that the weak inventory numbers in the GDP report could signal weaker growth the rest of 2011. A bright spot during the week was existing home sales, which rose 18% to an annualized rate of 329,000.

This week’s big reports are the ISM manufacturing index on Tuesday, the ADP employment report on Wednesday, and the official employment report from the Bureau of Labor Statistics on Friday. The ISM index hit 57 in December from 56.6 in November; consensus estimate this time around is for the expansion to edge up to 57.9. The two employment reports radically diverged last month, with ADP showing a gain of 297,000 private sector jobs and the nonfarm payrolls report showing only 113,000 private sector jobs (103,000 total). The unemployment rate dropped from 9.8% to 9.4%, mainly due to workers dropping out of the labor force. Consensus for this month’s report is that the economy will add 135,000 total jobs.

Notable earnings reports this week include: Exxon Mobil, which already reported this morning (earnings were up 53% in the fourth quarter, so the week is off to a good start); Archer Daniels Midland Co. and Pfizer on Tuesday; Ameriprise Financial Inc., Manpower, Mattel, and Time Warner Inc. on Wednesday; CVS Caremark Corp., Deutsche Bank, GlaxoSmithKline, Sony Corp., Toyota Motor Corp., and Viacom on Thursday; and Tyson Foods on Friday.

Aristotle wrote that humans are political animals, and being human means being able to reason and express emotions and ideas. In my opinion, the decision by Egyptian President Hosni Mubarak’s regime to cut off citizens’ ability to communicate was a colossal affront to liberty. It debases the citizens to the status of mere subjects or property. That anti-liberty action, coupled with Mubarak’s decision to force all government officials to resign rather than concede to people’s demand for his resignation, adds tension to a conflict that I don’t see ending soon. Although Egypt’s elections will be held in September, a more desirable alternative, in my opinion, would be to hold a general election supervised by supranational organizations in three months. But despots don’t step down easily or voluntarily.

Among investors, concerns about the price of oil could be alleviated if the United Nations were to intervene to secure shipments of oil and cargo through the Suez Canal. In terms of investment opportunities, the standard story is that unrest in Egypt will lead to a flight to safety, which bodes well for lowering yields on U.S. Treasuries—driving up oil prices, driving up gold prices, and perhaps even benefiting U.S. equities. Whether or not this scenario plays out depends on the global reaction to developing events and whether the Jasmine Revolution in Tunisia, which spread to the Lotus Revolution in Egypt, now spreads to Yemen or to other countries.

Long term, I think political movements to promote life, liberty, and the pursuit of happiness are good things. Short term, it’s tough to figure out how sentiment will shift, not only politically, but also in the financial markets. With all the ambiguity, I think it is important to stay focused on the long term and avoid getting caught up in the short-term market reactions.

The major indexes retreated sharply in an apparent response to growing political unrest in the Middle East, particularly in Egypt. The Dow lost 166 points, the Nasdaq fell by 68, and the S&P 500 declined by 23. Twenty-eight of the Dow’s 30 components lost ground, led by Microsoft (MSFT), which lost 3%. Volume was moderate to heavy and declining issues outnumbered advancers by about five to one. The prices of Treasuries strengthened, while the price of gold futures gained 1% to $1,341.70 an ounce. The price of crude oil on the New York Mercantile Exchange gained 4% to $89.34 a barrel. For the week, the three major stock indexes declined fractionally.

In Earnings News:

• Chevron announced that earnings increased from $1.53 a share one year ago to $2.64 in the latest quarter, thanks mainly to higher crude oil prices and growing demand, which lifted refinery margins. The price of the company’s shares (CVX) lost 1% in today’s session.
• Ford reported that earnings fell by 79% to five cents a share in the latest quarter, well below Wall Street’s expectations. However, earnings for the full-year 2010 jumped from 86 cents a share in 2009 to $1.66 a share, as the company appears to have put its brush with disaster several years ago behind it with the help of cost-cutting and redesigned cars and trucks. Nevertheless, in today’s session, the shares (F) fell 13%.

In volatile markets, it's important to have fund managers who can take advantage of tactical opportunities. Here to tell us about what's new with the Wells Fargo Advantage WealthBuilder Portfolios^SM is Doug Beath, one of the three portfolio managers of the funds.

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Real gross domestic product (GDP) for the fourth quarter increased by 3.2% (seasonally adjusted and annualized), driven by strong consumer spending and exports. Exports grew by 8.5%, and consumer spending increased by 4.4%. These are positive signs. Disposable personal incomes also grew by 1.7% in the fourth quarter, pointing to continued strength in consumer spending, though growth may be tepid.

However, an odd feature of the GDP report is the change in private inventories, which subtracted 3.70 percentage points from fourth-quarter results. In other words, if it weren't for inventories, GDP would have been 7.1% (GDP less the change in private inventories). Although inventories are a swing factor in every report, this swing was nothing but enormous. Inventories increased during the fourth quarter, but not as quickly as they increased in the third quarter. The slower pace of growth means that inventories actually detracted quite a bit from GDP. The way I interpret this is that any "inventory restocking" by businesses is likely going to come to a halt. That could weigh on 2011's GDP, supporting my contention that GDP growth for 2011 could be below 3.0%.

In 2009, real GDP decreased by 2.6%. In 2010, GDP grew by 2.9%. The upturn in GDP in 2010 reflected increases in exports, nonresidential fixed investment (especially computers), and consumer spending. Residential construction didn't lead in the rebound, but considering that there was—and is—a glut of housing, I don't see this as a problem. The fact that GDP is growing, despite a lack of big improvements in housing, is a positive sign for sustained growth. It may be slower growth than in the past, but it is likely to be more sustainable.

A strong earnings report from Caterpillar sent the Dow over the 12,000 line again, but it slipped back to close higher by only 4 points at 11,989. The Nasdaq gained 15 points, and  the S&P 500 advanced by 2. Twenty of the Dow’s 30 components gained ground, led by General Electric (GE), which rose almost 2%. Volume was light. Advancing issues outnumbered decliners by four to three on the NYSE and by a nose on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures fell by 1% to $1,318.40 an ounce. The price of crude oil on the New York Mercantile Exchange lost 1.9% to $85.64 a barrel.

In Earnings News:

• Caterpillar announced that earnings increased from 36 cents a share a year ago to $1.47 a share in the latest quarter, thanks to strong demand for the company’s earth-moving machinery in Asia and Latin America and to stronger-than-expected demand for mining machinery in North America. The results beat the Street’s expectations and the price of the shares (CAT) gained nearly 1% in today’s session.
• The price of Netflix shares (NFLX) jumped 15% in today’s session after the company reported on Wednesday evening that earnings increased 55% to 87 cents a share in the latest quarter, as the number of subscribers climbed by 63% from a year ago to 20 million and revenue rose 34%.

It still pays to have a college education.

Early election called for in Ireland as Green Party withdraws from coalition.

The New York Times to launch a paywall for online content.

Some context about the recent dismal S&P/Case-Shiller housing index numbers.

Secular bull and bear markets since 1927, now with charts.

Applying the Prisoner’s Dilemma to the massive mafia bust. Game theory in action.

A signal the economic recovery is really here: law school applications fall.

If tech starts partying like it’s 1999 again, should the Fed step in and pop the bubble?

Ready to get rid of your George Costanza wallet? Your smartphone might do the trick.

The Federal Open Market Committee (FOMC) again commented that the pace of economic recovery is “disappointingly slow.” There were few changes to the actual policy statement, but there are three things of significance with this most recent change: The FOMC reiterated its commitment to the policy of a second round of quantitative easing, dubbed QE2. Second, the FOMC signaled that it may time the asset purchases differently than originally announced. Finally, there were no dissenters from the stated policy.

In the previous policy statement, the FOMC highlighted that its $600 billion asset purchase program would average $75 billion per month. In this edition, the FOMC eliminated that comment. Although the purchases may still average $75 billion per month, investors should not expect the Fed to purchase $75 billion per month. Instead, the Fed may try to time its purchases to nudge interest rates at opportune times.

With the changing of the year came a changing of the voting members of the FOMC. The voting members consist of the Board of the Federal Reserve and then a rotating cohort of Federal Reserve district bank presidents. Tom Hoenig of the Kansas City Fed was the perennial dissenter to the FOMC’s policies, but he is no longer a voting member. Considering there were no dissenters, apparently none of the new voting members decided to pick up his baton. The current FOMC seems to be willing to push for more stimulus than less. That could punish the dollar in the short term, but it could also drive interest rates lower and might even fuel equity markets higher.

The markets rose on a unanimous Fed decision to stay the course and a mostly positive reaction to President Obama's State of the Union address, during which he called for a cut to the corporate tax rate. December new home sales provided another spark, with an unexpectedly strong increase.

The Dow at one point topped 12,000 but lost steam at the end of the day, closing 8 points higher with 12 of its 30 components ahead; the S&P 500 rose 5 to close in on 1,300; and the Nasdaq was up 20. Advancers led decliners by five to two on the NYSE and by three to one on the Nasdaq. The prices of Treasuries weakened. Gold futures rose 70 cents to close at $1,333 an ounce, and the price of crude oil gained $1.14 to settle at $87.33 a barrel.

In Earnings News:

• The Boeing Company's profit fell on fewer planes delivered. Fourth-quarter earnings came in at $1.16 billion, or $1.56 a share, down from the year-ago quarter's net income of $1.27 billion, or $1.75 a share. Production delays for its 787 Dreamliner will likely hurt earnings in coming quarters as well, with its full-year 2011 forecast coming in below estimates. Boeing's shares (BA) fell 3%. 

Disappointing earnings from 3M Co. and Johnson & Johnson took their toll on stocks for most of the day, as did a United Kingdom that might be sliding back into recession, but a sharp rally in the last hour of trading left the major indexes closing flat. A housing report, meanwhile, raised the specter of a double-dip fall in housing prices.

The Dow lost three points, with 15 of its 30 components higher; the S&P 500 was up less than one point; and the Nasdaq gained one point. Advancers and decliners were nearly in line on the NYSE, but decliners edged advancers by six to five on the Nasdaq. The prices of Treasuries strengthened. Gold futures fell $12.20 to close at $1,332.30 an ounce, while the price of crude oil lost $1.68 to settle at $86.19 a barrel.

In Earnings News:

• Verizon Communications Inc. reported higher fourth-quarter profit, largely due to a one-time gain related to accounting for its pensions. Verizon reported profit of $2.64 billion, or 93 cents a share, up from $617 million, or 22 cents a share, in the year-earlier period. Excluding the one-time gains, earnings per share was 54 cents. Verizon's shares (VZ) gained 1% on its expectations that 50% of its subscriber base will soon be on more profitable smartphones, especially the iPhone.
• Johnson & Johnson's earnings fell 12% on recalls and a slowdown in its health care markets. Its shares (JNJ) were down 1%.

“They can’t cut forever” was a common refrain among analysts throughout 2009 and 2010, and for a very good reason. Companies kept beating on earnings by cutting their operations to the bone, and instead of growing revenue, they grew their margins to record levels by performing some operational jujitsu and drastically reducing expenses. The rude awakening was supposed to come when companies were forced to add back some fat that had been cut, all the while struggling through a low-growth environment that would stifle revenue. It’s like going on a crash diet for a few months, and then, weak from hunger, being thrust into a roomful of Cheez-Its.

That rude awakening may still come for many businesses, but to get a sense of which ones might be able to hold onto those record-high margins, I went to Tom Ognar, portfolio manager of the Wells Fargo Advantage Growth Fund and someone whose investing philosophy demands close and constant attention to companies’ margins. What Tom’s been interested to see over the last two years hasn’t just been the drastic slashing of expenses. Most companies can, and did, slash away, and if they couldn’t they probably didn’t last long in this downturn. He instead paid attention to how smart they were about it, specifically by using technology to get a better and deeper view into their own businesses, particularly their inventory and merchandising systems. Tom relayed one recent conversation with a company:

Stocks were up strongly ahead of a full week of economic events, including a meeting of the Federal Open Market Committee, the release of preliminary fourth-quarter gross domestic product, and President Obama’s State of the Union address. It’s also a packed week of earnings reports, signaling investors might be optimistic about what they’ll hear from companies. A weaker dollar didn’t hurt, either.

The Dow gained 108 points to move within striking distance of 12,000, with 24 of its 30 components higher; the S&P 500 was up 7; and the Nasdaq rose 28. On lower volume, advancers led decliners by seven to three on the NYSE and by nine to five on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $3.50 to close at $1,344.50 an ounce, while the price of crude oil futures fell $1.24 to settle at $87.87 a barrel. A Saudi Arabian oil minister said today that OPEC might increase oil production this year.

In Earnings News:

• McDonald’s Corp. survived lower December sales—often due to bad weather—to post 2.1% higher fourth-quarter earnings. The fast food chain reported net income of $1.24 billion, or $1.16 a share, up from the prior year’s net income of $1.22 billion, or $1.11 a share. The company also announced it expects its commodity prices to rise up to 2.5% in the U.S. and up to 4.5% in Europe in 2011, which could mean passing along higher prices to consumers. Its shares (MCD) gained less than 1% in today’s trading.

It’s already shaping up to be an interesting earnings season. Financials are all over the map, with Goldman Sachs Group Inc. and American Express Co. coming in well under expectations while Wells Fargo & Co.’s were in line; Morgan Stanley’s earnings were up 60% over the prior year, compared with Bank of America’s widening loss. Major technology companies are doing well so far: Apple Inc., Google Inc., and IBM all had great-to-outstanding quarters. And then there’s industrial bellwether General Electric, which reported fourth-quarter profit was up 51%.

Last week’s release of the leading economic indicators index by The Conference Board continued its upward trend. On the more worrisome employment front, jobless claims came back down after spiking the previous week. Perhaps the most surprising bit of good news came from the housing market, with existing home sales in December rising 12% year over year. Through it all there was the grand spectacle of an official state visit by Chinese President Hu Jintao.

This week is chock full of market-moving reports.

A better-than-expected earnings report and forecast of economic growth ahead from bellwether General Electric sparked industrials and blue chip stocks. The Dow gained 49 points and the S&P 500 advanced by 0.29. The Nasdaq, however, lost 14 points. Eighteen of the Dow's 30 components gained ground, led by General Electric (GE), which rose 7%. Volume was light. Advancing issues outnumbered decliners by six to five on the NYSE, while on the Nasdaq, decliners outpaced advancers by three to two. The prices of Treasuries strengthened, while the price of gold futures lost 0.4% to $1,341.00 an ounce. The price of crude oil on the New York Mercantile Exchange lost 0.5% to $89.11 a barrel.

For the week, the Dow gained 1%, the S&P 500 gained 0.9%, and the Nasdaq declined fractionally.

In Earnings News:

Here with his outlook for 2011 is John Lynch, chief equity strategist with Wells Fargo Funds Management, LLC.

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There is an unusually vitriolic war of words taking place about the risk of bankruptcies and bond defaults by states and municipalities. It would be fun to watch if it were not so serious for investors in municipal bonds.

The municipal market correction is now being labeled by some as a meltdown, a rather liberal use of a highly pejorative term. Yields in the 5-, 10-,and 30-year segments of the municipal market have increased 80 to 90 basis points since mid-October. In the true meltdown of 2007-08, those yields rose 200 basis points. By those measures, this has been a mild meltdown.

Meltdown or not, the yield increases and the media focus on default risks have prompted substantial outflows from the muni market. The resulting selling pressures have unsettled the market to a degree not seen since late 2008. Just as back then, these unsettled conditions have created excellent investment opportunities.

Foreclosure activity hit record levels in 2010 and slowed down in December, according to RealtyTrac.

Ahead of the U.S.-China summit, Chinese President Hu Jintao was not happy with the U.S. dollar-dependent international currency system.

Curb your enthusiasm, U.S. investors: Goldman Sachs restricts Facebook investment to non-U.S. investors.

The best and worst jobs, according to Careercast.com. Philosophers fare surprisingly well; roustabouts, not so much.

European Central Bank President Jean-Claude Trichet argues for broader regulatory powers.

Speculation about an Apple without Steve Jobs, who announced he’s taking a medical leave of absence.

Treasury Department launches pre-paid debit card pilot program for tax refunds.

The U.S. by the numbers (the Census Department’s numbers, that is).

The major indexes retreated for the second consecutive day, with banking and networking stocks leading the retreat. After being down almost 80 points, the Dow closed lower by 2 points; the Nasdaq fell 21, and the S&P 500 declined by 1. Fourteen of the Dow’s 30 components lost ground, led by Caterpillar (CAT), which fell 2%. Volume was moderate to heavy. Declining issues outnumbered advancers by about two to one on the NYSE and by almost five to two on the Nasdaq. The prices of Treasuries weakened sharply, while the price of gold futures lost 1.7% to $1,346.50 an ounce. The price of crude oil on the New York Mercantile Exchange lost 2.4% to $89.59 a barrel.

In Earnings News:

• Morgan Stanley announced that earnings increased by 60% over last year to 41 cents a share in the latest quarter, thanks mainly to strong results from investment banking activity. The price of Morgan’s shares (MS) rose 4% in today’s trading.
• Southwest Airlines reported that earnings increased from 15 cents a share a year ago to 18 cents a share in the latest quarter. Revenue rose by 15% as the low-cost carrier increased ticket prices. The stock (LUV) lost 0.3%. 

Domestic equities have started out strongly in the opening weeks of 2011. Indeed, as of last Friday’s (January 14) close, the major equity market indexes had risen in each of the year’s first two weeks of trading, extending their rally from the final four months of 2010. Given this positive momentum, we’ve received a number of questions about the historical significance of the “January effect” and whether or not the opening month of trading can portend annual gains for the equity markets. Thanks to a study by our friends at Strategas Research Partners, the following points may prove interesting for long-term investors:

• Since 1928, the January effect—whereby the opening month of trading has signaled the direction of annual performance, up or down—has held true 73% of the time.
• However, it is worth noting that over the past 10 years, the rule of thumb that “as January goes, so goes the year” has held true only 50% of the time.
• Over the past 82 years, the average S&P 500 Index performance in January has been particularly strong, coming in at 1.2%, trailing only December (1.4%) and July (1.5%) as the strongest seasonal months for stocks. See Chart 1.
• Unfortunately, February hasn’t been too kind to equity investors, as the S&P 500 Index has fallen by an average of 0.3%. Only September’s average performance (-1.1%) has been worse.
• “Santa Claus rallies” in the month of December have also been a good harbinger for additional upside the following year. At 6.5%, December 2010 ranks fourth among the best Decembers since 1928. Only December 1971, December 1987, and December 1991 were stronger, with an average annual gain of 11% in the years following those strong Decembers.
• Of course, the month of January isn’t over yet, so stay tuned!

Past performance is no guarantee of future results.

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Headlines this week seem to be focused on the meeting of two presidents:  China’s and the United States’.   This is renewing discussion about the role of the dollar as a global reserve currency.  Is it just a product of the past? 

Yes and no. 

Yes, because it is the result of the fortunate sequence of events.  But, no, because those events weren’t really all that “fortunate.”  They were a matter of design, reflecting the U.S.’s importance in international output, trade, and finance.  There’s another important ingredient:  respect for private property rights.  China could rival the U.S. in terms of output, trade, or finance, but if they aren’t willing to respect individual liberties, there is little threat to the dollar’s role as a global reserve currency.

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Disappointing earnings reports in the financials sector held back the markets. Technology companies like Apple and IBM, however, had what were generally received as outstanding earnings news, with Apple’s up 78% over the prior year. Investors seemed prepared to sell on the good news, which led to the technology-heavy Nasdaq losing the most ground on the day.

The Dow finished lower by 12 points, with 22 of its 30 components losing ground; the S&P 500 lost 13; and the Nasdaq was down 40. Decliners led advancers by almost three to one on the NYSE and by five to one on the Nasdaq. The prices of Treasuries strengthened. Gold futures rose $2 to close at $1,370.20 an ounce, and the price of crude oil futures fell 50 cents to settle at $91.81 a barrel.

In Earnings News:

Stocks shrugged off disappointing earnings from Citigroup, an unexpected medical leave by Apple’s Steve Jobs, and another delay by Boeing to finish higher for the day. Price target increases for Google and Caterpillar by various brokerages helped the markets as well, with Google (GOOG) and Caterpillar (CAT) both up 2%.

The Dow finished higher by 50 points, with 18 of its 30 components higher; the S&P 500 was up 1; and the Nasdaq rose 10. Advancers led decliners by about five to four on the NYSE, and decliners marginally led advancers on the Nasdaq. The prices of Treasuries weakened. Gold futures gained $7.70 to close at $1,368.20 an ounce, while the price of crude oil lost 26 cents to settle at $92.31 a barrel.

Whatever index or indicator was released last week, it was generally up: producer and consumer prices were up slightly; retail sales rose for the sixth straight month; industrial production expanded; business inventories rose; the Beige Book showed economic improvement in all 12 Fed districts; and, on the downside, initial claims for unemployment were up as well, jumping 35,000 to 445,000. Perhaps the best news is what didn’t happen: Europe didn’t implode, and Portugal, Italy, and Spain all managed to survive bond sales without yields soaring catastrophically. All in all it was a good week, and the markets responded in kind, with the S&P 500 gaining 1.8% for the week.

This holiday-shortened week has some economic releases to watch, especially a slew of housing reports.  A pair of higher-profile manufacturing reports are released (the Empire State Manufacturing Index today and the Philadelphia Fed Survey on Thursday), and then three-straight days of housing reports: the National Association of Builders/Wells Fargo housing index is released on Tuesday, the Census Bureau reports on building permits and housing starts on Wednesday, and the National Association of Realtors releases its existing home sales report on Thursday. November’s existing home sales report showed sales rose 5.6% to an annualized rate of 4.68 million homes. Just as importantly, higher sales didn’t mean lower prices. The median existing home price rose slightly to $170,600, well off its peak, but at least stopping six straight months of declines.

Also on Thursday is the Conference Board’s index of leading economic indicators. The index rose 1.1% in November, and the consensus is a 0.6% rise in December.

Some high-profile earnings reports are on deck. Apple Inc. and Citigroup Inc. are scheduled to report today; eBay Inc., Wells Fargo & Co., and The Goldman Sachs Group Inc. on Wednesday; Google Inc. and Morgan Stanley on Thursday; and Bank of America Corp. and General Electric Co. on Friday, among many others.   

Financial stocks led the major indexes higher following a strong earnings report from JPMorgan Chase. The Dow gained 55 points, the Nasdaq rose by 20, and the S&P 500 advanced 9. Twenty-one of the Dow's 30 components gained ground, led by Bank of America (BAC), which gained 3%. Volume was light. Advancing issues outnumbered decliners by almost four to three on the NYSE and by almost five to three on the Nasdaq. The prices of Treasuries weakened, while the price of gold futures fell 1.9% to $1,360.50 an ounce. The price of crude oil on the New York Mercantile Exchange gained 0.1% to $91.54 a barrel.

Here with his outlook for 2011 is Jim Kochan, chief fixed-income strategist for Wells Fargo Funds Management, LLC.

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Changes in the U.S. Consumer Price Index (CPI) are generally used as a measure of inflation in our country, but with that comes a lot of room for interpretation. Before we launch into what it all means and how investors should view this information, first, the numbers. The CPI increased by 0.5% from November to December, resulting in a full-year change of 1.5% in the CPI for 2010. If you ignore food and energy prices (who wouldn't like to?), the monthly change was 0.1%, while the year-over-year change was 0.8%.

The major indexes closed lower following disappointing news from the jobs market. The Dow lost 23 points, and the Nasdaq and the S&P 500 both declined by 2. Sixteen of the Dow’s 30 components lost ground, led by Merck (MRK), which lost 6% after the company halted trials of vorapaxar, a promising blood anti-clotting drug. Volume was light and declining issues outnumbered advancers by seven to six on the NYSE and by five to four on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures gained 0.08% to $1,387.00 an ounce. The price of crude oil on the New York Mercantile Exchange lost 0.5% to $91.40 a barrel.

In Other Business News:

A successful bond sale in Portugal gave investors some breathing room to stop worrying about Europe for a moment, and stocks had strong gains, helped by a weaker dollar that fell against the euro. Commodities, particularly grain prices, jumped after a U.S. Department of Agriculture report downgraded its estimates of the U.S. wheat, corn, and soybean crops last fall.

The major indexes hit at least fresh two-year highs. The Dow finished higher by 83 points, with 24 of its 30 components up for the day; the S&P 500 gained 11; and the Nasdaq rose 20 to a three-year high. Advancers led decliners by almost five to two on the NYSE and by two to one on the Nasdaq. The prices of Treasuries weakened. Gold futures were up $1.50 to close at $1,385.80 an ounce, while the price of crude oil futures gained 75 cents to settle at $91.86 a barrel.

Ever wonder what a trillion dollars looks like? It might look like this.

The European Commission plans to take a new hard-line stance on failing banks.

The role of a dissenter on the Federal Open Market Committee, according to a dissenter on the Federal Open Market Committee.

Just who is Gene Sperling, recently named as President Obama’s choice to lead the National Economic Council?

Fear and uncertainty has investable consequences.

With $81 billion in profit, the Fed should just have an IPO and be done with it.

Japan steps in to the European sovereign debt mess with a pledge to buy eurozone bonds.

AT&T and Verizon begin the playground taunts over the iPhone.

Earnings season got off to a good start, with Alcoa swinging to a profit and some retailers raising their earnings guidance. Investors were hard to impress, however, and sent shares of companies such as Alcoa and Tiffany & Co. lower, even though the broader markets gained ground. There were no debt hiccups out of Europe today, although investors are waiting to see if a bond offering by Portugal tomorrow goes smoothly.

The Dow finished up 34 points, with 18 of its 30 components higher; the S&P 500 gained 4; and the Nasdaq rose 9. Advancers led decliners by about five to three on both the NYSE and the Nasdaq. The prices of Treasuries were mixed, with the 30-year strengthening and the 10-year weakening. Gold futures gained $10.20 to close at $1,384.30 an ounce, while the price of crude oil futures climbed 2% to settle at $91.11 a barrel, helped by the continued shutdown of the Trans-Alaskan pipeline and the release of the offshore drilling report in response to the Gulf oil spill last year.

This is a remarkable chart. It shows the amount of borrowing in the U.S. credit markets each year from 1965 to September 30, 2010. Two things are especially noteworthy. One is the exceptional growth in borrowing starting around 1995 and the other is the unprecedented collapse in 2009-10. If you want to know why the Fed's been able to keep interest rates near zero without causing rampant inflation, then pay close attention to this chart.

New year, same problems, different country. Portugal took its turn under the sovereign debt spotlight today, as worries about its bond sales later this week caused yields on Portuguese debt to jump to levels not seen since the introduction of the common currency. The markets were subdued most of the day as a result, despite increased merger and acquisition activity. Also today, the markets observed a moment of silence in recognition of the horrible shootings in Arizona on Saturday.

The Dow finished lower by 37 points, with 19 of its 30 components losing ground; the S&P 500 lost 1; and the Nasdaq gained 4. Advancers and decliners were nearly in line on the NYSE, and advancers led decliners by about five to four on the Nasdaq. The prices of Treasuries strengthened. Gold futures gained $5.20 to close at $1,374.10 an ounce, while the price of crude oil rose $1.22 to settle at $89.25 a barrel.

You’d think that all these organizations that release employment reports would get together beforehand and come up with a coherent story, but last week that clearly wasn’t the case. The ADP employment report showed a whopping gain of 297,000 private sector jobs, while the official Labor Department nonfarm payrolls report was disappointing, with only 113,000 private sector jobs added in December (103,000 total). Both reports, however, showed that major hiring was done in the services sector, a point made all the more forceful by the ISM services index report released last week, which showed that  the services sector expanded at the fastest rate in four years in December. The unemployment rate dropped from 9.8% to 9.4%, partly due to workers dropping out of the workforce.

Fourth-quarter 2010 earnings season begins this week, with Alcoa Inc. scheduled to report today, Intel Corp. on Thursday, and JP Morgan Chase & Co. on Friday. 

On Wednesday, the Federal Reserve releases its Beige Book, a collection of regional narratives describing economic conditions in each of the Fed’s 12 districts. It might give an indication of what to expect at the Fed’s next Federal Open Market Committee on January 26.

Not counting the dismal housing market and the disappointing state of employment, other areas of the economy are starting to pickup, so investors are on the lookout for signs of inflation. The major inflation gauges, the Producer Price Index and the Consumer Price Index, are released on Thursday and Friday, respectively.

Friday also sees the release of the University of Michigan Consumer Sentiment index for January and the closely watched retail sales report for December, released by the Census Bureau. Investors are interested to see how the holiday shopping season ended. The consumer sentiment report tells us what people say about how they feel (helpful to know for indications of future spending); the retail sales report tells us what they really did.

The much-anticipated jobs report was released this morning, and although the absolute number of jobs was a letdown, the direction of the economy’s recovery is getting clearer: toward service sector growth in output and jobs. Wednesday’s ADP employment report and the ISM services index both showed strong gains in the service (nonmanufacturing) sector, and today’s nonfarm payrolls report backed that up. The jobs number was disappointing enough, however, that it kept a lid on the markets.

Last year, we saw economic recovery and growth—albeit modest—in the markets. World powers flexed their economic muscles. And a changing of the guard in Washington kept our attention right up to the end, making for a not-so-lame-duck session. With all that behind us, what’s in store for the year ahead? Here with his outlook for 2011 is Dr. Brian Jacobsen, CFA, CFP, and chief portfolio strategist with Wells Fargo Funds Management, LLC.

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In a big surprise, the unemployment rate dropped from 9.8% in November to 9.4% in December, according to the U.S. Bureau of Labor Statistics Employment Situation Report. At the same time, December nonfarm payrolls increased a tepid 103,000 from November. Significant revisions to the November and October numbers added 70,000 to payrolls. Most gains were in the leisure and hospitality industries, along with the health care industry.

The dual messages owe to conflicts in the two surveys from which the Employment Situation Report is built: the establishment survey and the household survey. The household survey is used to calculate the unemployment rate, while the establishment survey is used to calculate the payrolls number. The reports have been giving conflicting messages since the recovery began in June 2009, so the increase in payrolls and the decrease in the unemployment rate were confirming signals of a recovery. Now, the question for me is: Which is the better indicator of things to come, the incredibly strong drop in the unemployment rate or the moderate increase in nonfarm payrolls?

I think the payrolls number is the more indicative of the two. Here’s why: The household survey still shows that 14.5 million people are unemployed. This is down from 15.2 million in January 2010, but the 6.4 million long-term unemployed figure—those who haven’t found work in 27 weeks or longer—has not budged significantly. Those who were working part-time but wanted to work full-time stood at 8.9 million. There were also 2.6 million people “marginally attached” to the labor force, which simply means that they want to work but didn’t look for work within the last four weeks. Of these, half were “discouraged,” meaning that the reason they didn’t look for work was because they didn’t think there was work available—this number is up 389,000 from December 2009. They have basically thrown in the towel. This level of persistent unemployment can serve as a floor for the unemployment rate over the next year. Taking the full employment situation into consideration, I don’t think we’ll see a drop in the unemployment rate like the most recent 0.4-percentage-point drop again—at least not any time soon.

Traction for the labor market may be good news for equity investors
I doubt employment will reach its previous peak in 2011. It may take until 2015 to get to that point. But if 2010 was the first full year of the recovery, where gross domestic product and retail sales recovered to their previous peaks, 2011 should be the year the recovery begins to get traction for the labor market. Job creation will continue to be the focus of policymakers for many years to come, which could create an increasingly conducive environment for businesses. It could also create a nice environment for equity investors over the next four to five years. 

The major indexes closed mixed after disappointing December retail sales. The Dow fell 25 points; the S&P 500 lost two; and the Nasdaq gained seven. Twenty-two of the Dow’s 30 components lost ground, led by Verizon (VZ), which lost 2%. Volume was light. Declining issues outnumbered advancers by five to three on the NYSE and by four to three on the Nasdaq. The prices of Treasuries strengthened, while the price of gold futures lost 0.1% to $1,371.70 an ounce. The price of crude oil on the New York Mercantile Exchange fell 2% to $88.38 a barrel.

In Earnings News:

• Constellation Brands announced that earnings improved from 20 cents a share a year ago to 65 cents a share in the latest quarter, thanks mainly to fewer restructuring charges and a lower tax rate. The world’s biggest winemaker also raised its earning guidance for the year. However, revenue in the quarter fell 2% as demand for wine continued to be weak, and the price of the company’s shares (STZ) fell 8% in today’s session.

In Other Business News:

• New claims for jobless benefits increased last week by 18,000 to 409,000, according to the Labor Department. However, new claims were still below 425,000, which is regarded by some economists as the threshold that signals the economy is creating more jobs than it is losing. Moreover, the four-week moving average of new claims fell to 410,750, its lowest level since 2008 and a sign that the labor market is still improving, albeit slowly.
• Retailers reported December sales that were generally lower than Wall Street anticipated, and they blamed snowstorms for a last minute fall-off in shoppers. Revenue at Target, for example, increased only 0.9% compared with a 4% increase that was anticipated. Costco’s sales rose 6% and Macy’s sales advanced 3.9%, both lower than expected.
• Treasury Secretary Timothy Geithner urged Congress to raise the federal government’s legally mandated debt limit. He said the limit of $14.3 trillion could be reached as early as March 31, and if the limit isn’t raised, the federal government could go into default on some obligations. “Even a short-term or limited default would have catastrophic economic consequences that would last for decades,” he said. 

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I found the corporate scandals of the past decade embarrassing to my sense of national pride, but the U.S. is not the only nation with managerial miscreants. Today, Agence France Presse, or AFP, reported that a corporate espionage scandal has broken out at Renault, the automaker. The company, which is partnering with Nissan of Japan in a big push to develop electric vehicles, plans to launch four electric cars over the next two years, including battery-powered versions of its Twizy and Kangoo models. And it’s the race to develop alternate power vehicles that has companies spying on each other.

According to AFP, Renault fired three top executives, including a member of the company’s top management council, for leaking secrets related to Renault’s electric car development efforts. Renault said its “strategic, intellectual, and technological assets” have been targeted by unnamed competitors, and the French Minister of Industry said the incident is an expression of “economic war,” although he declined to name the aggressor. Some people in Europe, however, may feel that France is not innocent of such shenanigans. According to the AFP’s report, a diplomatic cable recently leaked by Wikileaks quotes one executive of a German satellite company saying: “France is the evil empire stealing technology and everyone knows this.”

Sounds exciting! I can imagine a scene in the upcoming Hollywood thriller now: Han Solo, a rascally smuggler with a big heart (played by Harrison Mercedes), sits at the controls of his battery-powered rust bucket, “The Millennium Twizy,” and says to his large, furry sidekick: “Buckle-up, Monsieur Chewbacca, and we’ll try to make the leap to high speed. May la France be with us!” Title of the movie? Car Wars: Return of the Kangoo.

Our team of capital markets strategists—Brian Jacobsen, Jim Kochan, and John Lynch—just released their detailed 2011 outlook covering the general economy as well as the fixed income and equity markets. It’s not just an outlook, though; as often happens in history, to understand where we’re going you have to understand the odd places we’ve been during the past year or so. And what an odd year it was. They cover, among many other things:

• Why bond yields have been so low;
• What the Federal Reserve has been up to, and an examination of its success to date and prospects for future action;
• The effect of the dismal housing market on the economy;
• Equity market fundamentals versus technicals, and which is poised to carry the day in 2011;
• The risks of sovereign debt in the new year;
• What equity sectors, styles, and market caps are best positioned 2011;
• Their take on employment, inflation, and interest rates, as well as their estimate of gross domestic product (hint: they don’t believe it will match China’s, but then you probably could have guessed that yourselves).

One major theme they see playing out during the year is a continuation, and even amplification, of the market volatility we’ve all gotten to know and love the past few years. So get ready to rebalance your portfolio more often than you’ve perhaps done in the past.

Investors seemed skeptical of all the good economic news today, but the markets eventually climbed higher with solid gains, particularly from financials. ADP reported much stronger-than-expected job gains (perhaps too strong, skeptical analysts said), led by hiring in the service sector; ISM reported a strong increase in activity in the service sector, and the Challenger job cut report showed the fewest announced job cuts since June 2000. The news today made investors all the more eager for Friday’s official employment report to determine if ADP’s good news was an aberration.

The Dow finished higher by 31 points, with 17 of its 30 components higher; the S&P 500 gained six; and the Nasdaq was higher by 20. Advancers led decliners by almost four to three on the NYSE and by about seven to three on the Nasdaq. The prices of Treasuries weakened. Gold futures continued their downward slide, falling $5.10 to close at $1,373.70 an ounce, while the price of crude oil gained 92 cents to settle at $90.30 a barrel.

In Other Business News:

• Job creation in the private sector greatly exceeded expectations in December, according to a report by payroll processor Automatic Data Processing Inc., or ADP. The private sector gained 297,000 jobs in December, much higher than the 100,000 expected by economists. The increase mainly came from service sector jobs, with healthy gains coming from medium- and small-sized businesses.
• The service sector expanded at the fastest rate in four years in December, according to the Institute for Supply Management’s nonmanufacturing index. The index rose from 55 in November to 57.1 in December; a reading above 50 indicates expansion. Particularly strong was the new orders component, which jumped to 63.
• Planned firings by companies dropped 59% in 2010 from 2009, hitting a 13-year low. According to a report by Challenger, Gray & Christmas, Inc., U.S. employers announced 529,973 planned firings last year. Only 32,004 job cuts were announced in December, the lowest level since June 2000.
• Qualcomm Inc. confirmed today that it would acquire Atheros Communications Inc. for $3.1 billion, or $45 a share. Qualcomm said that the acquisition would help it expand its platforms into smartphones and tablet computers. Qualcomm’s shares (QCOM) gained 2%, while Atheros’ (ATHR) rose 1% (after jumping 18% yesterday on rumors of the acquisition).
• Global food prices hit a record high in December, according to the United Nations Food and Agriculture Commission. The monthly index rose 4.3% from November to top the previous high set in June 2008.

*****

On Monday, Apple Inc.’s market cap crossed the $300 billion mark, cementing its place as the second-largest U.S. company behind ExxonMobil. Of course, if Apple executives were relying on their own iPhones to wake them up Tuesday morning to read that fantastic news, they’d probably still be sleeping. The iPhone’s software didn’t handle the switch to a new year too well. Its alarm clock failed to go off for many people (including me), all the while looking very sneakily like it was perfectly set to wake me up early to begin a new year with hope and determination, as I’d resolved to do. Instead, I got some extra sleep.

Regardless of the glitch, it seems Apple is in shape for a huge year of iPhone and iPad sales, with Forrester Research predicting tablet sales of 24 million in 2011. Its competition is heating up, as well. The Consumer Electronics Show—or CES—an annual extravaganza of gadgets and electronic wizardry, started today in Las Vegas. Judging from early rumors coming out of CES, Apple will have more than an alarm glitch to deal with this year, because it looks like up to 100 companies are working on tablet computers, according to USA Today. Toshiba, Vizio, Motorola, and Research in Motion are all reportedly working on tablets for release this year. One reason for the push is Google, which is expected to release a new version of its Android operating system in the second half of the year. Called Honeycomb, it’s supposed to be better suited for tablets—unlike Android, which was designed for smartphones.

Analysts keep raising their estimates for tablet sales because, according to Forrester Research, they keep getting surprised by the many uses consumers are finding for the devices. They’re used for traditional computing, education, sales, and just as often, as “lifestyle” computers to watch YouTube videos and skim Facebook posts. Here in the investment world, financial advisors and sales personnel are keenly interested in them. Ignites, a mutual fund industry publication, said that a story about using iPads in the financial industry was its ninth most-popular story of 2010.

I’m still on the fence on tablet computers (well, I’m in the process of jumping the fence but I got my pant leg caught: I know that I want one, but I don’t know if I want to pay for one yet). That will probably change the second I hold one in my hands and decide I can put off fixing my car’s brakes for a few more months (just kidding; I’ll take it out of my food budget instead).

And since Daily Advantage is interactive now, I can (finally!) put a question to readers: Is this your “Year of the tablet,” as analysts are claiming? Is it all hype or are you intrigued by this new mode of computing?

Sometimes if you take a big enough step back, you can see clear patterns emerge, and sometimes you take a step back too far and you trip. Keeping that cautionary stance in mind, I think our current big-picture, macroeconomic view is pretty clear. The simple chart below, I think, accurately describes current global economic expectations. The chart suggests that developed economies, including the U.S., will likely grow their economies by 2% to 3% on average, while the emerging economies grow between 6% and 7% per year.

These are all estimates of GDP, of course, but right now it seems that emerging economies are fulfilling their end of the bargain and some of the developed economies are not. The U.S. has been in recovery for over a year and seems to be in no danger of another recession anytime soon, so I'd say that a U.S. GDP growth rate of 2% to 3% is a good target. Europe, however, is a different story. Several countries in Europe are facing difficult issues that will hamper their economic growth, as U.S. investors have probably heard only too much of recently. (If you've been a casual follower of the markets for awhile, you'll remember how little we used to hear about Europe, and now it seems European Sovereign debt makes the front page of The Wall Street Journal every day.)

So far, GDP growth rates and sovereign debt issues are fairly common knowledge, but it's been harder to figure out what the consequences of this dramatic growth imbalance between developed and emerging economies will be. What are the implications for an investor's portfolio? For example, investors could favor those companies that do more business with the emerging economies and be careful of those companies that derive a meaningful portion of their revenue from Europe. Last quarter, for example, Cisco reported earnings that didn't meet investor's expectations, and its share price dropped. One of the reasons for the shortfall cited by the company was sluggishness in their European operations.

I was intrigued by Cisco CEO John Chambers' comments on the global predicament Cisco faced. The company was in a "challenging economic environment," which is CEO-speak for "don't expect too much." But mainly, he was surprised at how fast government spending dried up, leading him to suggest that the government spending crunch may be "longer term in nature." With the public sector representing approximately 20% of Cisco's sales, and given the public debate about how the public sector's spendthrift ways must be reined in (both in the U.S. and Europe), it's difficult to see how Cisco can meaningfully grow the top line in the near term. I'm surprised the company didn't change its full year estimates for sales and profits despite lowering guidance for next quarter. That suggests to me that Chambers expects other parts of the business to make up the difference. Yet it doesn't seem that there's great visibility into Cisco's future sales, so there's the rub (for you more analytical types, Cisco's book-to-bill ratio is below 1).

Cisco's problem is just one way that the imbalance between developed and emerging markets economies is having tangible effects on global corporations. With austerity measures staring European governments square in the face, government spending will likely continue to fall, which spills over to government spending for services and goods sold by the private sector. Nutshell analysis, it's probably more important than ever to understand a company's end consumer: not just who they are, but where they are.

The securities listed should not be considered a recommendation to purchase or sell any particular security. The securities may or may not be in the Wells Fargo Advantage Funds.

Just in: our new Market Roundup for January 2011 from our Capital Markets Strategists. December went out with a bang, but one of the dangers of a market run like that is over-optimism. There's been some good economic news lately to back up that optimism, but that doesn't mean now is a time to get complacent. (I'll get back to you if I ever identify when it is a good time, exactly, to get complacent; haven't thought of one yet.) Check out their review of the markets (including a high-level economic review and detailed breakdowns of the equity and fixed income markets). Investors should expect continued volatility, but they don't think that means it's warranted to sit on the sidelines in cash. Investors who tried to wait out the volatility last year may have paid a big opportunity cost (of between four to eight percentage points, according to Jim Kochan). They're likely to pay the same price this year. In short, the dismal returns on cash and savings means you'll probably want to be in the game and off the sidelines, but the expected volatility means you'll probably need to pay attention and rebalance regularly.

The major stock indexes closed mixed in spite of falling commodity prices and a good report on factory orders. The Dow gained 20 points and closed at a two-year high, while the Nasdaq lost 10 points, and the S&P 500 fell one point. Twenty-one of the Dow’s 30 components gained ground, led by Alcoa (AA), which rose 4%. Volume was light to moderate and declining issues outnumbered advancers by about two to one. The prices of Treasuries weakened, while the price of gold futures fell by 3% to $1,378.80 an ounce. The price of crude oil on the New York Mercantile Exchange also declined sharply—by 2.3% to $89.38 a barrel.

The Federal Reserve released the minutes of its latest meeting, which showed that the Reserve’s members were comfortable with continuing the program of buying in bonds—a process known as QE2, or quantitative easing. The minutes also showed that the Fed feels the economic recovery is on track, but slow. “Even with the positive news received over the intermeeting period, the most likely outcome was a gradual pickup in growth with slow progress toward maximum employment," the minutes said. "The recovery (remains) subject to some downside risks.”

In Other Business News:

• Orders for factory goods jumped by 0.7% in November, as companies responded to growing demand for goods by consumers. (The gain follows a 0.7% decline in October.) Excluding big-ticket items like airplanes and automobiles, demand jumped by 2.4%, the biggest increase in eight months.
• Motorola, which pioneered in consumer electronics with its car radios, broke itself into two parts today—one focusing on consumer electronics like mobile phones and cable set-top boxes and the other concentrating on products for businesses, such as barcode scanners and police radios. The consumer business, Motorola Mobile, began trading under the ticker symbol (MMI) and gained 9% in today’s session. The stock of Motorola Solutions (MSI), the business-oriented company, was unchanged.
• The nation’s old line automakers reported big sales gains in December. General Motors reported vehicle sales increased by 7.5%, Ford’s sales grew by 6.7%, and Chrysler, which is privately owned, said its sales advanced by 16%. GM’s shares (GM) gained 2%, and Ford (F) rose by 0.7% in today’s session.

*****

Ahhh, it’s 2011 and the future is here. Are you ready for clothing brewed like beer? Yes, a clothing designer at Central Saint Martins College of Art and Design in London has figured out a way to culture clothing materials in vats. She starts with a “mother culture” of bacteria and yeast added to green tea. Left to fester for a few weeks, this brew develops a “thread of bacterial cellulose” that eventually forms mats that rise to the surface. (Such mats also form during the manufacture of some beverages, but they are discarded—not such a bad idea.) But Professor Lee prefers to wear them, and she has such a garment on display in London’s Science Museum. The resulting material has a leathery feel and is the color of beer. Lee calls her garments “bio-couture” and she claims they are easier on the environment than clothing made of, say cotton, which requires fertilizer. “Wow, nice jacket! I like the deep amber hue and the aroma of yeast with a hint of hops.”

This sounds very cool—especially if I want to look like a tea bag or a loaf of bread. Some people might argue I already resemble a deli item in my baggy jeans, but the new bio-couture would have an added virtue: The next time I’m caught in a Bronx traffic jam and the guy in the car next to me rolls down his window, shakes his fist, and calls me “pond scum,” he’ll be partly correct.

The speculation about an impending rash of muni defaults is probably based more on jitters over the U.S.’s sometimes precarious deficit situation than on a solid confrontation with the current state of the muni bond market. And the current state isn’t pretty, to be sure, but it doesn’t seem likely that we’ll get to between 50 to 100 significant muni bond defaults totaling hundreds of billions of dollars, as analyst Meredith Whitney claimed on a recent high-profile appearance on 60 Minutes. (Of course, if I were staring down Steve Kroft on a 60 Minutes segment called “State Budgets: The Day of Reckoning,” I’d probably panic and claim that most state budgets would be utterly destroyed by fire raining down from the sky. Likely to happen in, I don’t know, June, just before a vacation.)

But to get an idea about what’s more likely to happen, I turned to Lyle Fitterer, head of Wells Capital Management’s tax-exempt fixed income team. Lyle urges us to calm down a bit and take a closer look at how the muni market is actually structured before making these big top-down claims about how budget deficits will affect specific muni issues. And that broader perspective is telling. Whitney concedes that the problem isn’t at the state level, but mainly affects local general obligation (GO) bonds (which are bonds that are backed by taxes, not project-specific revenue, like a tollway project). Local GO debt comprises a small percentage of the overall municipal bond market.  For Whitney’s claim of hundreds of billions of dollars in default, every single local GO bond would have to default, which is about as far from likely as you could get.

But there’s no doubt that there’s a general sense of unease about the muni market. The question, then, is whether local governments are stretched so thin that they’ll view default as a possible option.  Most haven’t, so far. Municipalities have held up remarkably well throughout the economic downturn, through a combination of adjusting mill rates to make up for declining property values and federal government support. Total muni defaults (not just local GO bond defaults) dropped from $8.15 billion in 2008, to $7.25 billion in 2009, to $2.52 billion through November 2010, according to the latest available data. As times got tougher, defaults actually went down. The well-publicized bankruptcy of Vallejo, CA could be the exception that proves the rule by inspiring everyone to not be like the exception: no one wants to go through Vallejo’s equally well-publicized misery, and tough times have inspired tough measures. Lyle thinks the good news is that municipal revenues tend to lag the broader economy by 12 to 18 months, and since we’re now about 18 months off the bottom, revenue should begin to increase. And it has been: for the past three quarters, state revenue has been up year over year.

Lyle doesn’t want to claim there are no credit problems in the muni market, only that investors keep some perspective. He thinks that for every questionable municipal credit situation, there are probably 200 good ones. A well-diversified muni bond portfolio should be able to give investors access to the good credits out there while attempting to minimize the effect of defaults.

What a way to ring in the new year. Instead of a round of profit-taking to begin 2011, the markets climbed higher on good manufacturing news today and other solid economic news last week. Perhaps just as important, trading volume began to pick up today. Apple Inc.'s market cap rode the wave to top the $300 billion mark, cementing its place as the second-largest U.S. company, behind ExxonMobil.

All the major indexes hit fresh multi-year highs. The Dow finished up by 93 points, well off the highs of the day, with 25 of its 30 components higher; the S&P 500 rose 14; and the Nasdaq gained 38. Advancers led decliners by three to one on the NYSE and seven to two on the Nasdaq. The prices of Treasuries weakened. Gold futures rose $1.50 to close at $1,422.90 an ounce, while the price of crude oil gained 17 cents to settle at $91.55 a barrel.

In Other Business News:

• U.S. manufacturing activity in December continued to expand, according to the Institute for Supply Management's manufacturing index. The index rose from 56.6 in November to 57.0 in December, the highest rate of expansion in seven months. A reading above 50 indicates expansion.
• Bank of America agreed to pay $2.8 billion to Fannie Mae and Freddie Mac to settle claims that its Countrywide mortgage unit sold the government-sponsored mortgage companies bad loans. According to Fannie Mae, the amount covers 44% of the repurchase requests it has made to banks that sold what it claims are bad mortgage loans. Bank of America said it will take about a $3 billion provision in the fourth quarter to address the payment. Bank of America's shares (BAC) rose 6% on the news.
• New private investments in Facebook value the social-networking company at $50 billion, according to a report in The New York Times. Goldman Sachs invested $450 million, and Russian firm Digital Sky Technologies invested $50 million.
• Construction spending was up in November for the third straight month, according to the Commerce Department. Overall construction spending rose 0.4% month over month, with a 0.3% rise in private spending. Year over year, however, construction spending is down 6%.
• The cost to insurers from payments related to natural disasters jumped two-thirds from 2009, according to Munich Re. The German insurer estimates that total natural-disaster-related payments rose to $37 billion from $22 billion in 2009. Record-high temperatures caused a large number of weather-related catastrophes, according to the company, including heat waves in Russia and massive flooding in Pakistan.

*****

We interrupt your regularly scheduled Daily Advantage to bring you an exciting announcement. The newsletter has found a new home on the World Wide Web on our very own blog, AdvantageVoice. Kathi Kwiatkowski--who's been involved with Daily Advantage behind the scenes almost since it began 10 years ago--will be the manager of the blog, so we know we're in good hands. And as always, the Daily Advantage newsletter will still be emailed every weekday to subscribers in the same format, with exactly the same mix of stock market updates and offbeat news.

I've always thought that Daily Advantage in its email form is pretty blog-like anyway, with one crucial exception: it's primarily been a one-way communication. But as Peter and I have found throughout the years, our readers often have as much to say about a given topic as we do (and can often say it better). Judging by the emails we get, readers want to continue the day's story by filling in gaps, offering their own interpretations, and telling stories that highlight whatever it is we wrote about that day. Now, you can do that to your heart's content. All you have to do is read a post and leave a comment. We'll be responding to comments and helping to keep the conversation going.

As editor, I'll post other items from a number of people at the firm, such as our chief market strategists, investment analysts, portfolio managers, and others. Look for market updates, economic analysis, investing strategies, reader polls, and our podcast, On the Trading Desk^SM, among other things. Feel free to suggest topics and even recurring features, as well. My hope is that the blog evolves along with your ideas.

We've waited for years for this faddish thing called the internet to go away, but it's stubbornly survived, so we're following the time-tested advice of, "if you can't beat 'em, join 'em." (I resisted giving in and instead was using my thinking-outside-the-box abilities to develop a distribution strategy that revolved around a new technology called the "fax machine." It was then pointed out to me that I don't have any of your fax numbers. Also, that you probably don't have fax numbers.) The whole team here at Daily Advantage headquarters is excited about the new possibilities offered by the blog. We hope we'll get to hear from you often.

Last week was uneventful, with a blizzard almost shutting down New York and volume already light during a holiday-shortened week. The most exciting development from the blizzard was all the video of blizzard-buried New York City making the rounds on YouTube. There were, however, a few items of economic note. As expected, China raised its key interest rates a quarter of a percentage point to combat rising inflation. U.S. markets took the announcement in stride, but perhaps a more pronounced reaction would have occurred during a week with normal trading volume.

On the U.S. economic front, housing continued to be the bore at the party, with the S&P/Case-Shiller 20-city housing index showing a price decline of 1.3% from the prior month. That sad reality was countered by November’s pending home sales report by the National Association of Realtors, which showed that pending home sales were up 3.5% in November, with an even better 18.2% increase in contract signings. Not many people expected much out of the housing reports last week, but most analysts did expect consumer confidence numbers to come in higher than they did. As it was, consumer confidence lost ground, according to The Conference Board, falling from 54.3 in November to 52.5 in December.

On a better note, weekly claims for unemployment fell to their lowest level since 2008, dropping 34,000 to a seasonally-adjusted 388,000.

This week is packed with economic data, beginning with today’s release of the Institute for Supply Management’s manufacturing index for December. November’s report came in on 56.6, the second-fastest rate of expansion in six months; consensus for December’s is 57 (anything above 50 signals expansion).

On Tuesday, the Federal Open Market Committee releases the minutes from its December meeting, when it announced no change in interest rates and that it would continue its program of buying up to $600 billion in Treasuries. Also on Tuesday, factory orders for November will be released by the Census Bureau.

Wednesday sees the release of two private sector jobs reports, the ADP employment report, and the Challenger job-cut report. The ISM non-manufacturing index is released Wednesday, as well.

The most-anticipated report of the week (and probably the month) is the employment report released by the Labor Department. The unemployment rate rose in last month’s report to 9.8%; it’s not expected to budge much from there. And, most dismally last month, only 39,000 jobs were added, according to the non-farm payrolls report. About 111,000 are expected this time around. A big week to start the year.