As you may know, consumer spending makes up almost 70% of the US economy. If you look on the surface of the latest monthly retail sales report, the negative 1.5% drop gives a bearish sentiment. However, after looking deeper into the numbers, we find that after accounting for the termination of the cash for clunkers program, retail sales actually rose 0.5%. This was the second month for a surprise increase. Also pointing to a revived consumer was yesterday’s 3rd quarter GDP which came in above the 3.0% estimate at 3.5%. The positive here isn’t the “better than expected” increase, or even the increase above the 2nd quarter’s -0.7% decline, but where we saw the increase. Personal consumption increased 1.35% (after backing out the positive impact of cash for clunkers). Although the consumer spending rate is a delicate balance with the consumer savings rate, we welcome the current findings as being a positive for the general economy.

What we do not find so positive is our government’s uncanny ability to spend money. The US Treasury has completed another record week of debt issuance at $123 billion. The Federal Reserve is ending their purchase of US Treasury securities today (the quantitative easing program) at the same time the Treasury is planning to issue longer dated bonds (increasing the Treasury’s duration). Our concern is if the yield curve can’t adapt to the coming changes in supply / demand, it will mean higher interest rates for everyone, hindering credit and ultimately growth.

It goes without saying that these two topics are a few of the many we are continuously monitoring. Although October finished just under where it started (S&P 500 index at 1057 on 09/30/09), we had approximately 80% of companies report earnings above their estimates enabling the S&P 500 to reach a high of 1098. We will continue to monitor the state of the economy and position your portfolios accordingly.

We thank you for your continued trust and confidence in THOR.

Kindest Regards,

Your THOR Team