Week of November 5, 2007

The Markets
 
Ask and you shall receive. Investors were asking for another interest rate cut and the Federal Open Market Committee (FOMC) delivered last week as they lowered the federal funds rate by a quarter percentage point. The market’s reaction to the cut that day was positive, but by the end of the week, additional influences came in to play and the broad market ended down, as measured by the Standard & Poor’s 500 index.

At any point in time, as the FOMC ponders interest rate moves, they keep two key objectives in mind. First, they try to keep inflation under control and second, they try to ensure steady economic growth. If inflation is too high, the FOMC tends to raise interest rates, which increases borrowing costs and frequently results in slower economic growth. If economic growth is too slow, the committee tends to lower interest rates, which reduces borrowing costs and frequently leads to a stronger economy.

As you can see, the FOMC has to walk a fine line here by trying to peg interest rates at a level that will balance these two key objectives. In the statement that accompanied last week’s interest rate cut, the FOMC said, “The upside risks to inflation roughly balance the downside risks to growth.” This means the committee is in a “neutral” position and that they are about as likely to lower rates in the future as they are to raise them.

Investors tend to wait with baited breath each time the committee meets and then they tear apart the accompanying statement for any clues to the direction of the economy. At the end of the day though, the committee members are fallible just like everybody else. Sometimes they get it right and sometimes they don’t. However, despite the committee’s fallibility, investors still tend to put a lot of weight in the committee’s actions.
   

Sources: Yahoo! Finance, Barron’s. Past performance is no guarantee of future results.  Indices are unmanaged and cannot be invested into directly. Three-, 5-, and 10-year returns are annualized.  Assumes dividends are not reinvested.

THE NATION IS DIVIDED ON THE QUESTION OF WHETHER household finances have improved or gotten worse over the last year. When compared to a year ago, two in five (39%) say their household’s financial condition has improved while almost the same number (38%) say it has gotten worse. Almost one-quarter (23%) of survey respondents say it has remained the same.

Regionally, there are some differences in household finances. Those in the West are most likely to think things are going well as 45% say things have improved and just three in ten (31%) say things have worsened. They are followed by those in the East and South where four in ten (40%) in each region say their household’s finances have improved and 36% each say their finances have gotten worse. The Midwest is the region with the most financial trouble; just three in ten (30%) say their household’s finances have improved while almost half (48%) say their financial conditions have gotten worse compared to last year.

Asked to look six months into the future, Americans display their characteristic optimism as almost half (46%) say they expect their household’s financial situation to be better while just over one-quarter (26%) say it will be worse and 29% believe it will remain the same.

The most agreement came over inflation. Asked if they expect prices for things they normally buy to increase, decrease, or remain the same six months from now, more than four in five adults (82%) believe prices will increase, while 13% say they will remain the same. Just 5% of Americans expect prices to decrease.

It’s important to note that this survey was conducted in early September 2007, before the Federal Reserve’s most recent interest rate cut. The effect of that cut on the economy and consumers’ moods remains to be seen.    

Weekly Focus – Creative versus Methodical Thinkers

Why do some people solve problems more creatively than others? Are creative thinkers different from methodical thinkers? A new study by John Kounios, professor of Psychology at Drexel University and Mark Jung-Beeman of Northwestern University reveals a distinct pattern of brain activity, even at rest, in people who tend to solve problems with a sudden creative insight.

The pair say creative solvers exhibit greater activity in several regions of the right hemisphere which is involved in processing “remote” associations between the elements of a problem, an important component of creative thought.

Creative and methodical solvers also exhibit different activity in areas of the brain that process visual information. For example, the pattern of “alpha” and “beta” brainwaves in creative solvers was consistent with diffuse rather than focused visual attention. As noted in the Drexel press release, “This may allow creative individuals to broadly sample the environment for experiences that can trigger remote associations to produce an ‘Aha! Moment.’  For example, a glimpse of an advertisement on a billboard or a word spoken in an overheard conversation could spark an association that leads to a solution. In contrast, the more focused attention of methodical solvers reduces their distractibility, allowing them to effectively solve problems for which the solution strategy is already known, as would be the case for balancing a checkbook or baking a cake using a known recipe.”

Best regards,

Fredrick J. Livingston, CLU, CFP

Securities offered through LPL Financial, Member NASD/SIPC

* The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

* The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. 

* The Nasdaq Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

Brain Teaser Answer:  It contains the numbers one to nine, in alphabetical order.