Weekly Market Commentary

Looking Ahead to the Third Quarter of 2011

As market participants focus on the health of the economy and corporate earnings in the recently completed third quarter of 2010, Federal Reserve (Fed) policymakers are likely debating the outlook for the economy in the third quarter of 2011 and beyond.

This week, with a relatively light economic data calendar, the market’s focus may be on the third quarter earnings reports of S&P 500 companies, the Fed’s Beige Book and the full docket of Fed officials scheduled to make public appearances this week. Last week, data on merchandise trade, business shipments and inventories for August, retail sales, and consumer and producer prices for September helped to solidify the market’s view of real gross domestic product (GDP) growth in the third quarter of 2010.

Ben in Boston: Bernanke Makes His Case for More Quantitative Easing

In a speech in Boston on Friday, October 15, Federal Reserve Chairman Ben Bernanke laid out the case for the Fed to engage in another round of quantitative easing (QE). Citing weak economic growth, high unemployment and low and decelerating inflation, Bernanke made it clear that there is a “case for further action,” as the Fed tries to uphold its dual mandate from Congress “to foster maximum employment and price stability.”

Monetary policy, even dramatic and bold policy involving the purchase of large quantities of fixed income securities, in the open market intended to flood the system with cash works with a lag. These actions are intended to prompt interest rates to fall, businesses to borrow, hire and expand, and consumers to refinance debt and continue to repair their balance sheets. It takes a while (sometimes up to a year or more) for the stimulus to work its way through the system. As a result, there is obviously little that the Fed can do to affect the economy in the already completed third quarter. Any policy enacted by the Fed in the remainder of 2010 would only provide a small boost to growth in the fourth quarter. As a result, while Fed policymakers have some interest in the economic data referring to the third quarter of 2010, and the current fourth quarter, they are probably much more concerned with what economic conditions will be like looking out to the third quarter of 2011. Their hope is that by that time, their efforts will help to produce economic growth that will be above trend, pull down the unemployment rate, and modestly increase the pace of inflation.

Data for the Third and Fourth Quarters of 2010 Due This Week; Watch for Fed Dissenters

This week housing takes center stage with reports on homebuilder sentiment for October and housing starts and building permits for September due out. The health of the manufacturing sector as the fourth quarter of 2010 began will be assessed as the Philadelphia Fed Manufacturing Index for October is released later in the week. Finally, the index of leading economic indicators for September is due out in the back half of the week, as investors continue to get more comfortable with the “slow growth, but no double dip” view of the U.S. economy. As previously noted, the Fed’s Beige Book will get intense scrutiny when it is released (in preparation for the November 2-3 Federal Open Market Committee (FOMC)), as will the comments of the rather full slate of Federal Reserve officials scheduled to make public appearances this week.

In our view, with only a few weeks until the next FOMC meeting, there is not enough time for the incoming economic data to improve enough to deter the Fed from doing another round of QE. However, questions around the size, timing, composition, and efficacy of more QE will remain in the marketplace, and will likely be amplified by this week’s Fed speakers. Fed Chairman Bernanke certainly has more than enough votes on the FOMC, by our count, at least nine or ten out of the 12 current FOMC members have come out in favor of another round of QE. However, there are several Fed officials who would rather see the FOMC take a “wait-and-see” approach to more QE, while others are outright hostile to the idea altogether. Several of these officials who would prefer a “go-slow” or even a “no-go” approach to QE are scheduled to speak this week, so the financial press may be full of stories questioning whether QE will happen and whether it will work if it does happen. The only debate that matters on this issue is the one that will take place at the November 2-3 FOMC meeting, and the outcome of that debate is pretty much a foregone conclusion at this point.

A Look Back at Growth in the Third Quarter of 2010

Fed policymakers can do nothing to impact the pace of GDP growth in the recently completed third quarter, and have only limited influence over growth in the fourth quarter of 2010. Still, the Fed, market participants, and the financial media will be interested in the third quarter GDP release, which is due out on Friday, October 29. The third quarter will serve as a reference point for the Fed and for the markets, as they gauge the effectiveness of QE over the next several quarters. The data in hand thus far suggests that third quarter real GDP growth will come in at around 2.5–3.0%, with net exports, residential construction (housing), non-residential construction (businesses investments in office parks, malls and shopping centers), and state and local government spending exerting downward pressure on growth. The good news here is that while imports will exceed exports again in the third quarter, the gap is not likely to be as wide as it was in the second quarter. The data on housing and business investment in office parks, malls, etc. is likely to be bleak.

On the plus side, solid, but not spectacular consumer spending, which is likely to be slightly stronger in the third quarter than it was in the second quarter, solid business spending (although at a slower pace than in Q2), and most prominently, a big build in inventories will provide a lift to growth in the third quarter. Still, at right around the economy’s long-term average growth rate of 2.5%, growth in the third quarter is not swift enough to push the unemployment rate down or the inflation rate up. Thus, the third quarter GDP report, which is set to be released just a few days before the FOMC meeting, is likely to provide the Fed will plenty of reasons to do more to help stimulate the economy. However, the Fed is not so much concerned with growth in the third quarter of 2010 as it is with growth in the third quarter of 2011.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Stock investing involves risk including loss of principal. Past performance is not a guarantee of future results. Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Philadelphia Federal Index is a regional federal-reserve-bank index measuring changes in business growth. The index is constructed from a survey of participants who voluntarily answer questions regarding the direction of change in their overall business activities. The survey is a measure of regional manufacturing growth. When the index is above 0 it indicates factory-sector growth, and when below 0 indicates contraction.

The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Market Commentary

Still Waiting For a Spark

This week, as the focus turns to the start of the corporate earnings-reporting season for the recently completed third quarter of 2010, investors will also have plenty of economic news to mull over, including key reports on:

..The 2010 Federal Budget deficit

..Manufacturing activity (in the New York region) for October

..Consumer sentiment for the first half of October

..Retail sales for September

..Consumer and producer prices for September

..Imports and Exports for August

In addition to these notable reports, one of the most closely watched reports is likely to be the minutes of the Federal Open Market Committee’s (FOMC) September 21 policy meeting to be released Tuesday, October 12 at 2pm. The FOMC is charged by Congress with the dual mandate of maintaining price stability and maximizing employment, is currently debating whether to begin another round of quantitative easing (QE) in order to stimulate the economy. We expect the Fed will start another round of QE as soon as the November 3 FOMC meeting.

What Can the FOMC Minutes Tell Us About Quantitative Easing?

While there is still some debate in the marketplace as to whether or not the Fed should do more QE, the real debate between now and then will center on how the Fed will implement QE, and whether or not it will provide the spark that the economy sorely needs to reignite economic growth. That’s where the dual mandate — full employment and stable prices — comes in.

The current 2.0 to 2.5% run rate for real gross domestic product (GDP) growth in the United States is probably too slow to push the unemployment rate — which stood at 9.6% in September — down, and too slow to push inflation (which is running at around 1.0%) much higher. The Fed is concerned that if it doesn’t act, that growth will slow even further, pushing the unemployment rate higher, which in turn will lower consumer demand for goods and services and put downward pressure on prices, and eventually lead to deflation — falling prices.

The minutes of the September 21 FOMC meeting may provide some insight as to how the Fed might approach the next round of QE. One approach is being called the “shock and awe” approach, in which the Fed would announce that it is purchasing a large amount (perhaps $1 trillion) of securities in the open market. They took this approach in March 2009 in its first foray into QE. At that time, the economy and financial markets were in free-fall, and the shock and awe approach was probably warranted.

Another approach could be the “bits and pieces” approach, whereby the Fed announces that it intends to make a smaller purchase of securities in the open market, and then reevaluate the purchases (and the economy) at the next FOMC meeting. This approach might appease those on the FOMC who are concerned that more QE might trigger inflation down the road, but also might disappoint markets looking for a bigger Fed statement in support of the economy.

More recently according to press reports the Fed has been considering targeting interest rates as a way to keep rates lower for longer. In this approach, the Fed would buy the targeted securities (i.e. the 2-year Treasury note or a certain mortgage backed or agency security) in the open market whenever the yield on the selected securities got above a certain level. This would also cater to those on the FOMC who think the Fed should take a go-slow approach, and may find favor in the market as well.

The Fed could also decide to lower the rate it pays on commercial banks’ funds held by the Fed. The rate is currently 0.125%, but if it’s cut to zero, the banks would have more incentive to put the cash to work by lending to businesses, or simply buying Treasury notes.

The Fed could also do a combination of the items above, and it certainly has other options as well, as it attempts to provide the “spark” the economy needs to move to the next level in late 2010 and into 2011.

The September Employment Report Suggested that the Labor Market Remains Sluggish, and Needs a Spark

The September employment report (released on Friday, October 8) reminded the market why the Federal Reserve is likely to embark on another round of QE. Essentially, the September jobs report was more of the same. The gain in private sector (excluding government) employment of 64,000 was:

. .A bit below what the market expected (a gain of 75,000)

. .Represented a deceleration from the prior month — 93,000 private sector jobs were added in August, revised from 67,000)

. .Within the range of economists' estimates (0 to +110,000)

The unemployment rate stayed at 9.6% in September. The market was expecting an increase to 9.7%. The unemployment rate, while down from its peak of 10.1% hit in the fall of 2009, remains uncomfortably high for the Fed as well as politicians facing reelection in the upcoming midterm Congressional elections on November 2. The September employment report is the last employment report to be released prior to the election.

The underlying data in the jobs report tells the same story as the tepid headline gain in jobs. The first bright spot was the gain in household employment, the monthly jobs report consists of two surveys, the establishment survey, which asks businesses about their payrolls, and the household survey, which asks members of a household about their employment status. The second bright spot was the second consecutive monthly gain in temporary help employment, which is a good leading indicator of future employment trends. The weak spots were the readings on hours worked and overtime hours worked in September versus August. Another glaring weak spot continues to be the state and local sector, where another 83,000 jobs were shed in September. Over the past year, state and local governments have pared nearly 275,000 jobs from their payrolls amid budget cuts at all levels of government.

As we noted in last week’s Weekly Economic Commentary, The United States economy shed 8.5 million private sector jobs during the recent Great Recession, and has added back only 855,000 of those jobs since the economy began creating jobs again in the fall of 2009. Thus, over the past 11 months, the economy has added an average of around 77,000 private sector jobs per month. That gain of 855,000 jobs over the past 11 months is far better than the job creation seen at the same point, 14 months after the end of the recession, in the “jobless recoveries” following the mild recessions of 1990-91 and 2001. On the other hand, the 855,000 jobs created in the past 11 months are only a drop in the bucket compared to the millions of jobs created at this point in the recoveries from the severe recessions of 1973-75 and 1981-82.

Still, job creation of around 77,000 per month is not enough to push the unemployment rate significantly lower from 9.6% in September. The Fed is hoping to keep borrowing conditions favorable for businesses likely via another round of QE. As we discussed last week, low borrowing costs cannot be the only spark to reignite the economy, although low rates are certainly a big part of the story.

In addition to low rates, businesses need to have a favorable legislative and regulatory backdrop, and with markets now pricing in a high probability that the Republican Party wins control of the House of Representatives in the upcoming midterm elections, the sweeping legislative changes at the Federal level over the past two years will likely slow to a crawl. In addition to having low rates, and a favorable regulatory backdrop, businesses need to have good visibility about future prospects in order to feel confident enough to add to payrolls in a meaningful way. On this front, the tone of the third quarter earnings-reporting season, which begins in earnest this week, should provide more insight into how corporations view their prospects for the fourth quarter of 2010 and 2011.

Contrasts Between Developed and Developing Market Economies Have Implications for the Dollar, Commodities and Inflation

Overseas this week, central banks in India, Chile, Mexico, and South Korea all meet to set interest rates. Underscoring the strength in many emerging market economies, and economies with plentiful natural resources, India, South Korea, and Chile have already been increasing interest rates to combat inflation. On the other hand, central banks in most of the developed world — The Fed, the Bank of Japan (BOJ), the Bank of England (BOE) and the European Central Bank (ECB) — have struggled to keep rates lower for longer in an effort to reignite growth in the aftermath of the Great Recession which ended more than a year ago in June 2009.

This dichotomy between strong growth and rising rates in the emerging world and slow growth and falling rates in the developed world has implications for:

. .The US dollar (likely to head lower)

. .Commodity prices (likely to head higher, in large part because they are denominated in dollars)

. .Inflation in the United States (likely, and hopefully in the Fed’s view, headed higher)

. .The eventual exit strategy from easing (likely later than sooner)

China is one of the big drivers of the growth in the emerging markets, and this week, Chinese authorities will release several of China’s monthly roster of economic reports money supply, loan growth, imports, and exports — for September. Chinese gross domestic product (GDP) for the third quarter is set to be released the week of October 18-22. The market is expecting Chinese GDP to decelerate further to around 9.5% year-over-year growth, down from more than 12% year-over-year growth reported in the first quarter of 2010. At 9.5%, growth in China is more than three times as strong as growth in the developed world, and consensus forecasts for growth in 2011 call for another year of 9.0%+ growth.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Investing in international and emerging markets may entail additional risks such as currency fluctuation and political instability. Investing in small-cap stocks includes specific risks such as greater volatility and potentially less liquidity.

Stock investing involves risk including loss of principal Past performance is not a guarantee of future results.

Government bonds and Treasury Bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of a fund shares is not guaranteed and will fluctuate.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price.

The fast price swings in commodities and currencies will result in significant volatility in an investor's holdings.

This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Weekly Market Commentary

It’s All About Jobs

Market participants will have plenty to absorb in the first full week of the fourth quarter of 2010, as they reflect back on the best September for the S&P 500 since 1939, and begin to digest the first corporate earnings reports for the third quarter of 2010. On the economic front, the September employment report is likely to dominate the week, although there is plenty of other data due out, including the September chain store sales report and business capital spending and new orders in August. Market participants continue to firm up their forecasts for real gross domestic product (GDP) in the recently completed third quarter of 2010, and by the end of the week, unbelievably, the 2010 holiday shopping season should already be a hot topic.

Overseas, it is another quiet week on the Chinese economic data calendar. The bulk of the economic reports in China for September are due out next week (October 11-15). China’s currency remains a concern in Washington, although the vote in Congress last week targeting China’s currency is not likely to gain much traction in the Senate. A further escalation of protectionism in the United States (and abroad), which we think is unlikely, would be one of the preconditions for a double-dip recession in the United States.

Central bank policy meetings this week include the Reserve Bank of Australia, the European Central Bank (ECB), the Bank of Japan (BOJ), and the Bank of England (BOE) as well as the central banks in Peru, Indonesia, and the Philippines. Australia and Peru are expected to raise rates this week, while the others, including the BOE, BOJ, and ECB are leaning toward continuing to loosen monetary policy to bolster weak domestic economies.

The next meeting of the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC) is set for November 2 and 3. Unless we see a dramatic improvement in the economic data between now and then (not our best guess) the Fed is likely to embark on another round of quantitative easing, by purchasing Treasuries and agency and/or mortgage-backed debt in the open market in order to stimulate the economy by the end of 2010.

Not Jobless… But Not Enough

The only comprehensive report on the nation’s labor market between now and November 3 is the September jobs report, which is due out this Friday, October 8, at 8:30 AM ET. The U.S. economy shed 8.5 million private sector jobs during the recent Great Recession, and has added back only 755,000 of those jobs since the economy began creating jobs again in the fall of 2009. Thus, over the past 10 months, the economy has added an average of around 75,000 private sector jobs per month. That gain of 755,000 jobsover the past 10 months is far better than the job creation seen at the same point (14 months after the end of the recession) in the jobless recoveries following the mild recessions of 1990-91 and 2001. On the other hand, the 755,000 jobs created in the past 10 months is only a drop in the bucket compared to the millions of jobs created at this point in the recoveries from the severe recessions of 1973-75 and 1981-82.

Still, job creation of around 75,000 per month is not enough to push the unemployment rate significantly lower from 9.6% in August. Recognizing this, the Fed is hoping to keep borrowing conditions favorable for businesses with another round of quantitative easing, and by doing so, create a favorable backdrop for job creation. Of course, low interest rates, is not the only precondition for job growth. In addition to low rates, businesses need to have a favorable legislative and regulatory backdrop, and with markets now pricing in a high probability that the Republican Party wins control of the House of Representatives in the upcoming midterm elections, the sweeping legislative changes at the Federal level over the past two years will likely slow to a crawl over the next two years. In addition to having low rates, and a favorable regulatory backdrop, businesses need to have good visibility about future prospects in order to feel confident enough to add to payrolls in a meaningful way. On this front, the tone of the third quarter earnings-reporting season, which begins this week, should provide more insight into how corporations view their prospects for the fourth quarter of 2010 and 2011.

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IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. Mortgage-Backed Securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk. The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic

This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of  FINRA/SIPC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.