The Dow is still around 10,000 but seems to be losing a bit of momentum. As 2006 Nobel laureate Edmund Phelps said recently, the U.S. economic recovery will probably "run out of gas" as it heads toward the "new normal."  This new normal is a term that's been used by many lately to describe the old normal which had economic growth at more modest 4-5% levels than the 10%-plus experienced during much of the past 15 years. Rising unemployment will limit spending, not only of those unemployed, but those realizing they too could join that unfortunate class. Ultimately, this is good news as investors develop more modest expectations and spending habits while recognizing the benefits of saving and diversification. Investors should use this period to make certain their accounts are diversified among asset classes (stocks, bonds, commodities, cash, real estate) as well as diversified within each class. We continue to preach balancing and re-balancing portfolios. 

There has been an unprecedented amount of U.S. borrowing (issuing debt/Treasuries) to fund the stimulus package while the U.S. dollar continues to slide in value relative to foreign currencies. This would generally lead to a decline in prices and rising interest rates but there is still the value people are placing in safety and this has helped to stabilize prices. If the economy runs "out of gas" as suggested above, bonds will again become an investment vehicle of choice and so the outlook for bonds remains relatively calm. The yield for 1-year Treasuries is only about .3%, for 5-year notes about 2.3%, for 10-year bonds about 3.5% and around 4.4% for 30-year bonds. Investment-grade municipals yield tax free income and are paying about .6%, 1.8%, 3.2%, and 4.5% for the same time periods. Similarly, investment-grade corporate bonds are yielding 1.3%, 2.9%, 3.5% and 6.1%. As mentioned in prior newsletters, this may be a time to consider "inflation-protected" Treasuries.

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Real Estate There continues to be mixed news from the real estate markets. And by markets, understand there are a variety including: residential, commercial, distressed, new, existing, urban, rural and so on. On the positive side, mortgage rates dipped under 5%, the tax credit of $8,000 for first time home buyers was extended, the number of homeowners who are "underwater" (owing more than the home is worth) declined in the 3rd quarter while the number of home sales rose 11% (although up to 30% of the sales were from the purchase of distressed properties). There continued to be concern, however, with many expecting commercial real estate to have a meltdown (although smaller) similar to the one experienced by residential real estate (6% of all commercial loans totaling $110 billion are currently in default). Additionally, 123 of 153 metropolitan areas showed price declines during the 3rd quarter and many expect up to 7 million more residential foreclosures to come on the market which means lots of supply and lower prices - there were a record number of foreclosures in this year's foreclosures totaling $34 billion compared with $19 billion during the same period last year. Despite a mixture of positive and negative news, those who have good buying opportunities and a long-term time horizon can benefit from this period of weakness to make selective purchases.