It was a huge week for news, and there are financial repercussions all around. So prepare yourself to hear the headlines you've heard all over again -- this time through a macro Foolish filter.
1. The market goes on to impress
What happened? The Dow continued to rumble and bumble its way into new record territory this week, displaying no weakness through an onslaught of negative events. Despite numerous reasons to retreat back to familiar territory, the Dow seems poised to continue marching through a better-than-expected earnings season.
What does this mean for your portfolio? After my negative prognostication for the market last week, I am humbly left without much to say. However, I believe there is still solid evidence to support a bearish outlook on the market. While the inverted bond yield is not a guaranteed indicator for recession, it certainly can be a red flag for one. Add that to the reality that there hasn't been a 10% correction to the market in about three and a half years, and I do think there is something to be concerned about. Until then, however, I hope everyone can ride the tide to new, great profits. Just don't get greedy.
2. Googtube or Boobtube?
What happened? Those who are savvy with the Internet have probably been familiar with both mega-names for quite some time. So when Google (NASDAQ:GOOG) purchased video portal YouTube for $1.65 billion in stock options, everyone was forced to pay attention.
What does this mean for you portfolio? Regardless of what people might say about the deal and whether people think $1.65 billion was too high a price to pay for an unprofitable video site, Google can afford it. Enough said. If, from here, synergies create lasting profitability for Google, then that's just another trophy on the mantle for the Internet megalith. What is important to note here, however, is whether this prompts Google's more desperate competitors to go after high premiums for questionable opportunities. Specifically, I'm thinking of the scrutinized talks between Yahoo! (NASDAQ:YHOO) and social site Facebook, which now seems to be holding out for more money, after initial rumors of a $1 billion buyout offer. Yahoo! can't afford to overpay, yet it may be tempted to dole out more money just to avoid losing this prospect.
3. Bernanke balks at interest-rate cuts
What happened? Fed Chief Ben Bernanke and his board fellows made it patently clear that no guarantees would be made about interest-rate cuts later in the winter. Expectations over such an occurrence went from a likelihood of 82% on Oct. 4 to a paltry 18% on Oct. 11, according to Bloomberg.
What does this mean for your portfolio? As usual, investors can take this to mean that there will be no unnatural boon to the market as a result of cheaper money. Additionally, Bernanke has indicated that his attempts to quell inflation have not yet been completed. While the price of U.S. homes fell in August for the first time in 11 years, other more traditional indicators of inflation have risen. Combine this data with the growing rate of employment, and you've got the Fed worried about growing weakness in purchasing power.
4. Trade deficit continues to bulge
What happened? The trade deficit continued to increase on a multitude of issues, including increased consumption of Chinese goods, rising oil prices, a relatively strong dollar, and rising overall imports. For August, the deficit was reported at nearly $70 billion, an all-time high that raised concern in some circles.
What does this mean for your portfolio? While at first glance a rising trade deficit may spell trouble, the real story lies in the value of imports and exports, both of which rose by more than 2% from the reported July numbers. As such, this news isn't as worrisome as it might initially appear. This growth for both figures, along with other economic metrics, provides strong evidence of a robust economy -- particularly increased consumer spending. While the U.S. can't allow the trade deficit to inflate continuously, the U.S. can soak it up for the time being.
5. Federal deficit scales back
What happened? The federal deficit has fallen almost to $248 billion, nearly 1.9% of GDP -- its lowest levels since 2002. The source of this good news is largely attributable to increased corporate and individual income taxes, as well as what has been an impressive profit season for the economy.
What does this mean for your portfolio? This is as much of a political issue as I care to delve into, but simply speaking, a reduction in the federal deficit is a good thing. The White House has claimed that its efforts to promote growth through tax cuts and corporate incentives have largely allowed the administration to keep its re-election promise of cutting the deficit in half. Critics have cried foul and suggested that the administration only cut in half its own inaccurate estimates for the growth of the deficit. This back-and-forth is likely to continue for quite some time. However, we all can be sure that the federal deficit will bear the weight of looming crises, in the form of that retiring generation we like to call the baby boomers. This reduction is probably a temporary sigh of relief to what will be a lingering infirmity.
6. The North goes nuclear
What happened? On Monday morning, the media reported that North Korea joined the world's elite club of world nuclear powers when it tested the nation's first nuclear device.
What does this mean for your portfolio? I suspect that few Fools have investments directly linked to North Korea. But the nation's proximity to the rest of the Asian economic bread basket is a cause of great and legitimate concern for all involved. If you have shares of an emerging-market ETF such as iShares Pacific Ex-Japan Index Fund (AMEX:EPP), then you should be especially concerned with the events that will unfold. The most susceptible target is South Korea, but other parties are bound to be involved, such as Japan and China. In fact, we've already begun to witness the reaction, by way of Japan's imposed sanctions. I doubt that Kim Jong-Il has the strategic capability to launch a nuclear device at any of the countries mentioned, but escalating tensions can wreak havoc on your foreign funds.
7. Big boys deliver results
What happened? In the first week of October's earnings season, a few commercial favorites have announced that their numbers will beat analyst expectations. McDonald's (NYSE:MCD), PepsiCo (NYSE:PEP), Costco, and others have brought in better-than-anticipated numbers to the delight of shareholders and outside investors alike.
What does this mean for your portfolio? In the worrisome past few days, it has been the positive results of the aforementioned consumer favorites that have propped up the markets, along with the shedding of the excessive energy prices of the summer. This is great news as we head into holiday spending season. However, I would pay close attention to how quarters come in for other important retailers, such as Target (NYSE:TGT), to gauge the true strength of this past fiscal quarter.
Yahoo! And Costco are Motley Fool Stock Advisor recommendations. For more of Tom and David Gardner's market-beating recommendations, try out Stock Advisor free for 30 days.
Fool contributor Nick Kapur does not own shares of any stock mentioned above. Since he is not a military analyst, he cannot guarantee anything about North Korea's missile capabilities. The Motley Fool has a disclosure policy.
