by Merlin Hernandez

The global financial environment remains uncertain and Eurozone problems will continue to be a major risk factor. Both the Fed and the ECB will take pressure off credit markets by increasing capital flows for some while. Business gains are increasingly less driven by market share considerations but more on cost control for margin improvement, and improved quality and service for added customer value.

But employment levels and consumer spending have not yet recovered sufficiently to sustain pre-recession production volumes. Lowering inventory and carrying costs as well as reduced production could see further shut downs and layoffs in the fourth quarter and going into 2013. The incentives created by QE3 and low interest rates seem a little slow to sink in and business remains cautious and in no great rush to embark on new projects in the general pre-election malaise.

Monetary policy in a lingering recession will of necessity be concerned with stimulating growth. QE3 increases liquidity to re-ignite investment but effectively devalues the US dollar. We can, however, expect an increase in demand for US exports as a result which provides another engine for growth. The other advantage, of course is a reduction in the trade deficit which will ultimately strengthen the dollar.

Some analysts are predicting increased inflation and a rise in the price of commodities and natural resources necessary for production. and the risk of general price increases. But commodities were down October 31 as a response to the much anticipated Chicago PM Index falling just short (49.9) of the 50 point mark for economic expansion. Supply and demand will clearly be the final arbiters and it is fair to project that with increased international trade, demand would be the lever to keep prices down.
Precious metals, however, are negative betas and we can expect gold and silver prices to fall as investors re-direct money back into the economy.

For October, the market has hopscotched through the rumor mill of a debt downgrade (denied by Fitch), and sputtering growth in a housing sector weighted down by less than expected growth in previously owned homes in spite of some increase in new home sales. But the Department of Commerce reported that spending on both consumer products and durable goods showed a little above the 2% annual growth rate in the third quarter. The Department of Labor reported a decrease in jobless claims for the same period. Both DOC and DOL reports are important economic markers.

Perhaps the most important indicator of growth moving toward 2013 is the Dow Jones. Even though the Dow is not really representative of the overall market, it does reflect the movement of stock prices to provide an indication of the tide of investor interest. There has been significant growth in energy (Chevron, Exxon), basic materials (Alcoa, Tech Resources, CFI Holdings), and industrial goods (Caterpillar, Emerson) which is an indication of the economy readying itself for increased production. Combined with the availability of investment capital, Fed support for housing/construction through QE3, some early movement in the sector, and low interest rates, the economy does appear to be poised for sustained growth. It would depend on how fast entrepreneurs and investors get off the starting block post election.