2010 Economy Update

2010 was a very nice year on Wall Street. At the closing bell on December 31, S&P 500 finished up 12.78% for the
year and the Dow, NASDAQ and S&P all posted double-digit yearly gains.
The economy grew in shallow U-shaped. The Fed didn’t touch the benchmark interest rate all year. However,
unemployment rate stayed above 9%. The real estate sector stumbled along; mortgage rates fell remarkably before
rising a bit at the end of the year. Consumer spending increased; inflation was barely on the radar. The bull market in
commodities continued. Foreign economies struggled with problems much greater than ours.

The American economy comes down to the consumer, and the good news is that consumer spending increased.
Consumer Price Index gained just 1.1% from November 2009 to November 2010.

Let’s look at the growth in the service and manufacturing sectors through the lens of the Institute for Supply
Management. Its November manufacturing report indicated the 16th straight month of growth in the sector, with
employment trending positive for 12 months and production expanding for the past 18 months. The November service
sector report indicated the 11th straight month of expansion and the 15th straight month of growth when it came to
new orders. Census Bureau data showed durable goods orders up 14.3% from year-ago levels in October.

The Fed committed to buying $600 billion worth of Treasuries through June 2011 and announced plans to buy up
to $900 billion in debt by the end of next September. In December, the President struck an accord with Republicans
resulting in swift passage of new tax laws: the EGTRRA and JGTRRA cuts were preserved for another two years,
employee payroll taxes were cut by 2% for 2011, and the estate tax resumed for 2011 at 35% with a $5 million

2010 was a harsh year for the euro and for the European Union. Central banks and governments faced payback for
years of loose lending and nonchalant spending. Greece was the first EU member to crack, getting a €110 billion
bailout from the EU and the IMF in May. In November, Ireland got a ₤72 billion EU/IMF bailout, and Portugal and
Spain remain on the EU watch list. (At one point last year, the bank bailout guarantees amounted to about 25% of
the EU’s GDP.) In May, French Prime minister Nicolas Sarkozy warned that his country would ditch the euro if
Germany’s chancellor, Angela Merkel, didn’t agree to create an EU bailout fund. She did, and a €440 billion fund is
now in place for any future rescues.

In the third quarter of 2010, China became the #2 economy in the world, right behind the United States; Japan fell
into third place. China’s manufacturers saw their collective profits rise 49.5% across the first 11 months of 2010. The
nation’s central bank twice raised interest rates during the year. Japan couldn’t shake its deflation in November, its
core consumer price index went negative for an astonishing 21st consecutive month, but its industrial output rose in
November for the first time in six months.

Looking at the consequential stock markets around the world, we see some great 2010 performances. At the top we
find Argentina’s MERVAL, +51.8% for the year. Second, we have Indonesia’s Jakarta Composite, +46.2% for the
year. Rounding out the top five, we have Thailand’s SET (+40.6%), the PSE Composite in the Philippines (+37.6%)
and Chile’s IPSA (also +37.6%). Some benchmarks went negative: Australia’s All Ordinaries index (-2.6%), Japan’s
Nikkei 225 (-3.0%), Ireland’s ISEQ (-3.0%), France’s CAC-40 (-3.3%), China’s Shanghai Composite (-14.4%). In
U.S. dollar terms, the World Index gained 9.55% and the Emerging Markets Index posted a 16.36% return.
The bull market continued. Palladium was the best-performing marquee commodity of 2010, gaining an astonishing
97.3%. Other metals also posted great yearly gains: gold rose 29.8% to close 2010 at $1421.10 per ounce, silver gained
83.8% to $30.91 a troy ounce, and copper prices rose 33.4% to $4.4395 a pound for December. Platinum futures
advanced 21.5% last year.

Oil climbed 15.2% for the year, with prices finishing the year at $91.38. Natural gas was the “blown tire” of the
commodities sector, with futures dropping 20.9% for 2010. Corn gained 51.8%, wheat 46.7% and soybeans gained
34.1%, spurred by a drought affecting Russia. Coffee futures were up 76.9% for the year, and sugar futures gained
19.2 across 2010. The Dow Jones-UBS Commodity Index followed its 19.0% 2009 gain with a 16.8% advance for

In November 2010, existing home sales were down 27.9% from a year ago, though the median sale price improved by
0.4% in that time. New home sales were down 21.2% from 12 months ago, with a median sale price of $213,000.

Has the housing market hit bottom? Will we have to wait until sometime in 2011 or 2012 to see a bona fide recovery?
As the biggest drag on the real estate market is actually unemployment, and as unemployment will continue at high
levels, the real estate sector does not look too bright.

Mortgage rates fell remarkably in 2010. Rates were on the upswing in December, at least in the short term. When
Freddie Mac assessed matters on December 30, they noted the following year-to-year movement: average rates on
conventional 30-year FRMs had moved down to 4.86% from 5.14%; rates on 15-year FRMs were averaging 4.20%,
down from 4.54%; average rates on the 5-year ARM were at 3.77%, down from 4.44% a year prior.

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