The Econ­omy and Bond Mar­ket Cheat Sheet (Octo­ber 31, 2011)

Trea­sury yields were higher this week as Euro­pean lead­ers reached an agree­ment in prin­ci­ple to recap­i­tal­ize the region’s banks, address the Greek debt sit­u­a­tion and expand the Euro­pean Finan­cial Sta­bil­ity Facil­ity. This agree­ment largely removed the threat of another full-blown finan­cial cri­sis and money shifted back toward riskier assets.

Another piece of good news that sup­ported riskier assets this week was the release of third quar­ter GDP data. GDP rose 2.5 per­cent in the third quar­ter, match­ing expec­ta­tions but also qui­et­ing some crit­ics expect­ing the U.S. to fall back into a recession.

Strengths

• The res­o­lu­tion of the imme­di­ate cri­sis in Europe was the most sig­nif­i­cant pos­i­tive event this week.
• GDP rose 2.5 per­cent in the third quar­ter as con­sumer spend­ing rose 2.4 percent.
• Sep­tem­ber durable goods orders, exclud­ing the volatile trans­porta­tion sec­tor, rose 1.7 per­cent. This is the largest rise six months.

Weak­nesses

• Con­sumer con­fi­dence fell to the low­est level since March 2009, which was the bot­tom of the global finan­cial cri­sis. Con­cerns sur­round­ing jobs and real incomes drove the sur­vey down.
• Global news flow con­tin­ues to point toward an eco­nomic slow­down as U.K. fac­tory orders fell to the low­est level this year, the Bank of Canada sharply reduced its fourth quar­ter GDP fore­cast and expec­ta­tions are for growth to slow below four per­cent in Brazil next year.
• Infla­tion risks remain as the Reserve Bank of India raised inter­est rates by 25 basis points due to stub­bornly high inflation.

Oppor­tu­ni­ties

• With the Euro­pean news behind us for the time being, investors will refo­cus on eco­nomic data such as next week’s ISM man­u­fac­tur­ing report, the Fed­eral Reserve Open Mar­ket Com­mit­tee (FOMC) meet­ing and Octo­ber unem­ploy­ment data.

Threats

• While the cur­rent Euro­pean plan to deal with the cri­sis is a pos­i­tive step for­ward, many details still need to be worked out. More­over, the plan does not deal with poten­tial prob­lems in other Euro­pean coun­tries such as Por­tu­gal, Spain and Italy.

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., and a Toronto, Canada native, which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure. The company’s funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper’s top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper’s top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories. Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of “The Goldwatcher: Demystifying Gold Investing.” He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies. Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron’s, The Financial Times and other publications. Read more from the author/contributor here.

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