Market Commentary from David Joy, Riversource

David Joy — Chief Market Strategist, RiverSource Investments
Slight Setback for Economic Growth
On the road toward a sustainable economic expansion, last week represented a modest setback. Weaker-than-expected reports on industrial production and housing starts suggested that the recovery remained fragile.
The weakness in housing may have occurred because of the uncertainty surrounding the status of the first time home buyers tax credit, since extended and expanded. Of course, we will find out the answer next month, but the weakness in the October report does exhibit just how dependent the housing sector is on government incentives. The strength in existing home sales as reported this Monday, which rose to the highest level since February 2007, was likely itself distorted by buyer anticipation of the expiration of the tax credit program.
The industrial production report showed a gain of just 0.1 percent in October after three successive, strong readings averaging increases of 0.9 percent in the third quarter. Both the manufacturing and mining components fell, while utility output rose sharply. A decline in auto production accounted for most of the manufacturing weakness.
Stocks mostly drifted lower last week in response to the softer data and a slightly stronger dollar, although the Dow Jones Industrial Average managed to eke out a small gain. Commodity prices were also generally higher, especially gold which rose another $30 to $1,148 an ounce.
Equity investors have been trying to come to terms recently with a number of indications that the recovery rally is showing signs of fatigue: light volume, relative weakness in financials and small caps, elevated sentiment, fewer new highs, full valuations and so on. This watchfulness is compounded by the suspicion that a correction might be due, since we haven't experienced one throughout the entire recovery from the March lows. But also causing some concern are divergent messages are coming from the bond market.
Last week, the yield on three-month Treasury bills turned negative. That's right, negative. In other words, some investors are willing to accept a return of less than zero for the assurance of getting their money back in January. Certainly part of the reason is related to large institutional parking of ample excess cash, but it also hints at some measure of concern. In addition, certain credit spreads have stopped contracting or have been widening recently, hardly a ringing endorsement of the momentum behind the budding economic recovery.
Assurances from central banks around the globe that liquidity will be maintained indefinitely do offer some comfort that the reflation story is still alive. But we are getting closer to the moment of truth when final demand will need to step forward, and corporate revenues will need to rise for this rally to keep going. Judging from investor response to recent statements from Federal Reserve officials, the easy money, weaker dollar story maintains the upper hand for now.

Year End Tax Planning

While the last thing you think about as the holidays approaches is your tax planning, you really should, if you want to make sure you save dollars come tax time in April. Here are my top tax planning tips before December 31st:

1) If you do not qualify for a Roth IRA because of your income ( phase out starts at $166,000 AGI for married couples, $105,000 for single filers) then you should consider making a Non Deductible Traditional IRA contribution- you will be able to convert that in 2010.
2) If you are in over a 28% tax bracket, you should consider maxing out your 401(k) before the end of the year. Look at your remaining paychecks and see what you should increase your deductions to in order to reach the max.- $16,500 for individuals under 50, and $22,000 for over 50. This will help you save more in your tax bill for 2009 as well as save more for your retirement and take advantage of some STILL market lows.
3) Evaluate your nonqualified investment portfolio. ( these are assets that you hold outside of your IRA's and 401(k) plans). For example, stocks or mutual funds you hold in a brokerage account. Look to see if you should sell any losers to reinvest into something better and take a bad situation ( no one likes to admit to having a loss BUT it does happen) and turn it into a tax savings.
EX: I bought GE at $30 and it is now worth $16 per share- if I sell to reinvest in a potentially better performing company, I can write off that loss- up to $3,000 a year right OFF my EARNED income- so if I made $150,000 this year, now my income is $147,000. you can also use it to offset future capital gains! Keep in mind, if you want to buy back the same position, because of wash sale rules, you have to wait 31 days. If you are concerned about not being in a position over those 31 days, then you can still invest in something else. For example, if I sell my gold mining stock at a loss, but still believe in my gold mining stock, I could buy a GLD etf for those 30 days to make sure I still have exposure to the gold market.