Diversification is a word that is often mentioned as an important part of investing;  but, what exactly is diversification?  Diversification is investing your account across different asset classes or market segments (large companies, small companies, international companies, etc.) in an effort to reduce the volatility in your account.  However, proper diversification does not mean simply picking multiple funds that invest in different types of companies or locales.

Risk tolerance comes into play when diversifying your account in terms of your overall asset class mix.  For example, a conservative investor  (someone that prefers to have less fluctuation or volatility in their account) is likely to have a larger portion of their account is less risky investments, such as bonds and cash equivalents, with a smaller portion going into more risky assets, such as small cap and international stock funds.  Contrast this with an aggressive investor that  could be entirely invested in stock funds with a larger holding in riskier investments.

There has been quite a bit of media attention lately talking about how diversification is dead and that the last ten years were a “lost decade”.  This is simply not true.  The data they are using is if you were invested in only the S&P 500 Index (an index of large-cap stocks).  Most investors, like yourselves, are not invested in just large-cap funds.   In fact, a recent article in the NY Times illustrated if you were diversified you, likely, didn’t have a lost decade.

Given the clarification on the “lost decade” and the importance diversification can have on retirement planning, there are a number of common diversification pitfalls to avoid. These pitfalls include investing in only one fund that is not  pre-diversified, such as a target date fund, investing in every fund in the plan in equal percentages, picking an asset allocation based on a general rule of thumb and investing a large percentage of your account in company stock.  I’ll address the first three here and will follow up with an article on company stock.

One Fund This usually happens when an investor picks the fund that’s performing the best in the plan, or when an investor is entirely in cash.  Investing in the hottest fund can be extremely harmful to your account, as a fund that has gone up 60% in a year can just as easily decline 60% in a year.   And while it’s true that you are not subject to the volatility of the market when you’re invested entirely in cash, it’s also true that will likely lose money over the long-run  due to inflation.

Investing in Every Fund Investing in every fund will give you some diversification but it likely will not give you an appropriate asset allocation.  Investing in every fund could put you overweight in certain asset classes and result in more or less risk in your portfolio than you intend.

General Rule of Thumb There are a number of rules of thumb communicated to investors, including the Rule of 110.  This rule suggests that the percentage of your account that should be invested in equities can be determined by subtracting an investor’s age from 110.  While the Rule of 110 can provide a valuable starting point, it should not be construed as an end point.  Constructing a portfolio should be done not merely by picking an asset allocation based on your age, or a general rule of thumb, but by doing research or consulting a trained, unbiased adviser that can help you put together a portfolio based on your risk tolerance, investment goals and time horizon.

If you need help putting together a diversified portfolio, please contact us or another trained investment adviser.  In the meantime, please feel free to contact me directly at 913.744.3376 or by email at bwendel@smart401k.com with any questions that you may have regarding diversification.  Also, please keep an eye out for the next installment of Common 401(k) Pitfalls.

Buck

A look at some of the market movers over the past week:

• Job losses were less than expected and the unemployment rate stayed at 9.7%
• The Fed’s Beige Book showed continued economic improvement, though winter storms took their toll
• There was unrest in Greece as the country took on austerity measures in hopes of paving the way for European Union aid
• Prudential agreed to buy AIG’s Asian life insurance unit for $35.5 billion

• Merck agreed to buy Millipore for $7.2 billion
• Berkshire Hathaway released its much-awaited annual letter to shareholders
• Financial reform continued to struggle getting bipartisan support
• CIT Group lost $4 billion in 2009
• Donald Kohn announced that he will be retiring from the Federal Reserve
• Citigroup sold a $230 million stake in Primerica to Warburg Pincus ahead of an expected IPO of the unit
• The U.S. government may demand a brake-override system on new cars
• Dow Chemical sold its Styron plastics unit to Bain Capital for $1.6 billion
• The Treasury turned a handsome profit on Bank of America warrants
• Consumer borrowing increased in January after a record 11 straight declines

Commentary

The market got some hop back in its step this week. The S&P 500 index finished in the black all five trading days and racked up a 3.1% gain by week’s end. Thanks to the positive employment report, the market had its best day on Friday with a 1.4% bump. The S&P is now in the black by 2.1% year-to-date.

As Warren Buffett has been increasingly looked to as a general market sage — as opposed to just the Chairman of Berkshire Hathaway — the annual letter that he writes to Berkshire shareholders has become quite an event. For our purposes, Buffett didn’t reveal much in the way of thoughts on the broader economy. This was largely due to the fact that he thought the media misinterpreted some comments he made in last year’s letter. He did, however, note that he believes the residential housing market will stabilize over the next year.

Greece continued to be in the spotlight over the past week as the country tries to deal with an overwhelming debt load. Though the country is far from out of the woods, it did take some positive steps during the week. It was able to sell roughly $6.8 billion worth of bonds, suggesting that it does still have access to the capital markets. The bonds had to be sold with a considerable yield though, raising concerns that it will still be difficult for Greece to refinance much of its debt.

The country also instated austerity measures during the week, seeking to lower its budget deficit into a more manageable range and potentially open the possibility for European Union aid. While slashing the deficit is a necessary measure to get the Greek economy back on track, the specific measures that the government took have led to unrest and strikes in the country.

The U.S. economy, meanwhile, seems to continue heading in the right direction. The Fed’s Beige Book report was released midweek, and the overall tone was very similar to last month’s. Specifically, the economic conditions in most of the Fed regions appear to be seeing continued improvement, even though the stabilization was somewhat distorted by the violent East Coast snowstorms.

As in past months, a few select areas continue to hold out against recovery, notably commercial real estate, construction, and loan demand.

Potentially even more positive were the employment reports during the week. On Thursday, initial unemployment claims came in at 469,000, down from 498,000 the week prior and below the low end of expectations. Meanwhile, the unemployment rate held steady at 9.7%, despite some predictions that it would rise back into double digits.

The 36,000 payroll cuts during the month were fewer than expected. Many experts have further noted that without the sever winter weather during the month we may have seen net jobs added to the economy. Most expectations now seem to show the economy adding net jobs through the rest of the year, though it’s questionable whether the pace will significantly bring down the unemployment rate by year’s end.

Looking ahead

It will be a much quieter week for economic reports next week. Retail sales on Friday will be the focal point of the week. At the low end, expectations are that retail sales fell 0.2% last month after gaining 0.5% in January.

Initial unemployment claims will also continue to be a notable data point. Current forecasts show claims falling further next week, potentially as low as 445,000. In addition to unemployment claims, Friday’s sentiment report from the University of Michigan could draw some eyes. This will be the first reading for March and it’s expected that sentiment rose from the prior month.

Earnings will still be in full swing in the coming weeks, but market participants are paying less and less attention to the reports as broader market indicators. Alcoa is currently scheduled to kick off first quarter 2010 reporting on April 12, and there should be more focus on earnings as we approach that date. Not only will analysts start chattering about what they expect from the first quarter reports, but we will also likely hear some pre-announcements that will give a taste for what’s to come.

In the meantime, the week ahead will likely continue to focus on government action, both home and abroad. President Obama’s healthcare plan is still on the table and the Democrats seem set on finding a way to pass it sooner rather than later. Meanwhile, progress has been slow on financial reform, and there is sure to be more churning on that in the coming week. Overseas, Greece is far from out of the woods, and we should expect to hear more news coming from that country, as well as other EU member states as they debate giving Greece financial aid.

The merger market has fired back up lately and has been a nice catalyst for the market. Deals are often brought together over the weekend, so look for deal activity to be a potential positive driver early in the week.

A couple things stuck out to me:

1. We are a consumer driven economy – It wasn’t a new revelation, but it continues to impress me (and not in a good way) that our GDP is approximately 70% consumer spending.
2. The economic crisis took three decades to build up – During the last thirty years our individual debt levels have roughly doubled.  Some of this is due to an increased availability of credit, but most is, in my opinion, due to people living well beyond their means.
3. Consumer spending is coming back, but at lower than pre-crisis levels. – Many people are predicting a new level of “frugality.”  I’m hoping it’s more a new level of sustainable rationality.

The current debate, now that we seem to have exited the recession, is what follows now.  Most people seem to be in one of two camps.  The first side believes that the recovery will be “U” shaped.  Essentially, the belief is that the economy will continue to recover, but do so slowly.  The second camp believes that once the government’s stimulus spending ends we are headed for a fall, because things like consumer spending hasn’t, and won’t recover anytime soon.  My impression was that Mr. Barkema believes in the “U shaped” recovery theory based on his belief that government spending will get us through 2010 by which time the economy will be on solid enough footing to continue the recovery on its own.

1. As for how this relates to your retirement planning: Right size your spending – There is a big difference between a want and a need.  If a purchase is a “Want,” try asking yourself whether you really want it or if it’s just something that caught your eye.  Many times it probably won’t even be a “want” and, as a result, it’ll be easy to eliminate.
2. Save more – If it is a U-shaped recovery, we’ll likely need to save more to reach our goals.  Try increasing your 401(k) contributions by 1% now (and each year after).  I doubt you’ll even notice that it’s missing and it’ll have a big effect on the account’s future value.
3. Focus on the simple things – For me, anyways, I get the most enjoyment out of the simple things, so I’ve made a renewed effort to doing those things more often, such as having friends over instead of an expensive night out.

It probably didn’t surprise you to hear that our economy is a consumer driven economy.  So it’s a bit of a catch-22. If we don’t spend anything our economy struggles, but if we spend too much we set ourselves up for another fall.  Rather than not spending, or living beyond our means, I suggest we instead live within our means while also making sure that we have goals to work towards and successes to enjoy.

So my challenge to you is this –eliminate a “want” each week for the next four weeks and leave your comments/thoughts/actions here, or if you’re a client feel free to leave them in the forum.   I’ll do the same and look forward to hearing about your progress.

Scott H

A look at some of the market movers over the past week:

• The much-awaited healthcare summit took place in Washington, but it’s unclear that a bipartisan bill is any closer
• Schlumberger agreed to acquire Smith International for $11 billion
• Many European countries may have obscured debt levels through complex financial transactions
• A meeting among U.S. governors was split on the merits of government stimulus spending

• New credit card rules kicked into effect
• President Obama unveiled his healthcare reform proposal
• Intel is working on a $2 billion investment fund that would target U.S. companies
• RR Donnelley agreed to buy Bowne for $481 million
• Xerox is suing Google and Yahoo over Internet search patents
• General Motors may wind down its Hummer brand after efforts to sell it fell through
• The SEC voted to limit short selling
• Toyota executives were chastised in front of the U.S. Congress
• In his Congressional testimony, Ben Bernanke stressed that interest rates should stay low for the foreseeable future
• Sales of both new and existing homes fell unexpectedly
• The Treasury may introduce new measures to try and stem residential foreclosures
• AIG reported a much smaller loss than in the previous year
• Fourth quarter GDP growth estimates were bumped to 5.9%

Commentary

It was a relatively boring week on the markets, but by the close of trading on Friday the bears had gotten the best of it as the S&P 500 finished with a 0.4% loss. On a more positive note, trading in February brought the index up 2.9% after a 3.7% loss in January. The S&P is now down 1% for the year.

In his semi-annual testimony before Congress, Federal Reserve Chairman Ben Bernanke made clear that the Fed would continue to keep its main target rate at the low levels it is currently at for the foreseeable future. In recent weeks, the Fed has started to pull back some of the emergency programs that it had put in place to help shore up the U.S. financial system during the worst of the crisis. The Fed also raised the rate it charges banks for direct emergency loans.

Despite these moves, Bernanke made clear that he still views the U.S. economy at the beginning of a recovery and is still very concerned about employment and the housing market. His hope seems to be that low rates will continue to allow a broader economic recovery that will start to create more jobs and encourage consumer spending.

In related economic news, the government upped its estimate of fourth quarter GDP growth from 5.7% to 5.9%. While the increase may seem like a positive sign, many experts and commentators have emphasized that much of the jump came from business spending to bolster depleted inventory levels. The concern is that without a resurgence in consumer spending, high, or even moderate, growth rates may not be sustainable.

And though the President’s healthcare summit may not have had much of a direct impact on the markets, it certainly provided plenty of news fodder. The summit was hoped to encourage bipartisan support for some sort of healthcare reform, but the end result seemed to leave the process at square one.

If there’s any significant development for investors from the healthcare happenings during the week, it was the proposal that President Obama introduced prior to the summit. As part of the funding for the proposal, the President wants to raise capital gains taxes to 22.9%, up from the current 15%.

Looking ahead

With the month of February coming to a close over the weekend, next week’s economic calendar includes many of the month-end releases. Monday we’ll see personal income and spending, construction spending, and the Institute of Supply Management’s main index. Wednesday will bring the ISM services report, the Fed’s Beige Book, and an initial read on employment with ADP’s employment report.

Thursday we’ll have more employment data by way of the weekly initial unemployment claims as well as fourth quarter productivity and January factory orders and pending home sales. Finally, on Friday we’ll get a full batch of government employment data, including the unemployment rate.

Employment will obviously be the focus point for next week, with the unemployment rate being the piece of data the market will likely key on. Current expectations show the rate increasing from 9.7% to somewhere between 9.8% and 10%. Initial unemployment claims, which are a more coincident indicator than the unemployment rate, shouldn’t be ignored though. Expectations for the coming week are a wide range of as low as 475,000 to as much as 515,000.

Investors may also take some time to consider what the Federal Reserve has to say in its Beige Book report. The report has individual Fed governors weigh in on the economic conditions in the Fed regions. It seems likely that the upcoming report will sound a lot like previous reports — that is, suggesting that there is overall economic improvement, but that select areas such as consumer spending and housing continue to lag.

Credit cards can be your best friend or your worst nightmare. When used appropriately, they provide a convenient and efficient way of making purchases. Whether it’s filling up your gas tank or buying groceries, a credit card can speed up the purchase process and keep you from having to carry around a pile of cash or fumble through a pocket of loose change. They can also help you build a credit score that will be used in determining the rates you’ll pay on loans, like mortgages. Unfortunately, if you spend too much, even the best credit card in the world isn’t going to be able to help.

As an Investment Adviser, I talk to a lot of individuals about credit cards and credit card debt. A recurring topic of these conversations is figuring out which of the thousands of different credit cards is the most appropriate for your lifestyle. These days, it seems like every time we open the mailbox there’s a new credit card being offered. And it never fails, BIG BOLD LETTERS on the envelope advertize a great feature that we absolutely must have. As overwhelming as these offers may get, there are a few simple strategies to keep in mind when deciding which type of card is right for you based upon the following lifestyle trends.

Always Pay Your Balance and Only Charge Small Amounts

If you always pay your balance in full, the rate being charged by a credit card isn’t a big concern. Instead, you should look for a card that doesn’t charge an annual fee and, if available, offers some type of cash back reward. Most of the cards that offer huge rewards charge an annual fee and require that you spend thousands of dollars a month to build up the necessary points to earn a benefit. If you’re not spending enough to earn these points, there’s no sense in paying the annual fee. While a simple 1% cash back might not sound like much, think of it as getting a 1% discount on everything you already planned on buying.

Always Pay Your Balance and Charge Large Amounts Each Month

If you’re going to spend the money, you might as well get rewarded! Some type of cash back or rewards card will make the most sense for you. Take a look at your spending habits and find the areas you spend the most. You can then find a card that offers bonus points when you spend on that category. If you do a lot of driving, high cash back rewards on gas and convenience store purchases would make sense. If you travel a lot, hotel points and frequent flier miles would be a good benefit. While an annual fee may be charged on this type of card, the benefits you receive could outweigh the cost – just be sure you know how much you have to spend to earn the benefit. For example, if you sign up for a gas card that offers 3% cash back on gas purchases, but imposes a $50 annual fee, you need to spend roughly $1,700 on gas before you start to earn a benefit above the annual fee.

Carry Balance and Only Make Minimum Payments

If you carry a balance on your card, the last thing on your mind should be cash back or rewards points. Right now, your focus should be on getting the card paid off as quickly as possible. If your card currently has a high interest rate, you might want to look for a card that offers a lower, fixed rate and allows you to transfer your balance. Some cards even offer a 0% introductory period. If you can pay off your balance during the introductory period, this might be a great option. However, be cautious of what the rate will jump to once the grace period ends. This situation should also cause you take a look at your spending habits. If you’re constantly spending more than you can afford, it would be a good idea to review your budget and figure out where you can cut-back.

When evaluating which of the above categories you fall in to, it’s important to be honest with yourself. While you may claim that you’ll pay off your full balance each month, if you haven’t done this in the past, how much can you trust that you’ll start doing it in the future? A great online resource from Bankrate.com is their “Find the Best Credit Card” calculator. By answering a few simple questions, the program will generate an answer for what type of card is best for your personal situation. The link to this calculator is below:

http://www.bankrate.com/calculators/managing-debt/find-best-credit-card.aspx

While it may be impossible to determine exactly which card is the best, it’s important to choose the type of card most appropriate for your lifestyle. Remember, nobody becomes a millionaire by cashing in their credit card points. Instead, it takes a devoted long-term strategy of living within your means. If you have questions about credit cards or credit card debt, or are looking for help with developing your long-term investment strategy, call Smart401k today.

Joe McCulloch, Investment Adviser

A look at some of the market movers over the past week:

• Greece and its debt crisis remained in the spotlight
• A group of telecom operators teamed up to battle Apple’s apps store
• U.K. inflation was surprisingly high in January
• Foreclosures remain a difficult problem for the housing market

• Simon Property Group is battling to take over bankrupt General Growth Properties
• Toyota is continuing to try and stem the fallout from its recent recalls
• In December Japan once again became the top holder of U.S. Treasuries
• Apple and Research in Motion are being investigated for patent infringement
• Standard & Poor’s cut its rating on Blockbuster to CCC
• Walgreen agreed to acquire Duane Reade
• The Federal Reserve released the minutes from its most recent meeting
• The International Monetary Fund will soon begin sales of nearly 200 million metric tons of gold
• The Federal Reserve raised its rate on direct loans to banks
• Google was approved to begin buying and selling bulk power
• Senate Banking Committee Chairman Christopher Dodd plans to introduce a new finance reform bill next week
• Consumer prices rose less than expected in January

Commentary

The holiday-shortened week was a good one for investors, as the S&P 500 index climbed 3.1% by week’s end. The week started with a 1.8% jump on Monday and was followed by three more up days. The S&P has now pared its year-to-date loss to 0.5%.

The government and Federal Reserve held center court over the past week. Christopher Dodd, the Chairman of the Senate Banking Committee, is expected to release a plan for financial overhaul next week. Dodd’s plan is expected to include a council of regulators to monitor economic risks as well as a new banking regulator. If Dodd’s bill is passed, the House and the Senate will have to reconcile differences between it and a bill already passed in the House.

The Federal Reserve released the minutes from its most recent rate-setting meeting and its outlook continues to improve. The Fed noted improvement in overall business conditions and suggested that consumer spending — with the exception of December — appears to be on the mend as well. While board members noted that the job market has shown some improvement, they also pointed out that labor market participation continues to decline. The housing market, meanwhile, still seems to be seen as the thorn in the economic recovery.

The Fed made even bigger news on Thursday, though, when the central bank raised the discount rate that it charges banks for direct loans from 0.5% to 0.75%. The Fed quickly reassured markets that the move was not an indication that it will start tightening credit more broadly, but rather a reaction to improvements in the health of the banking system. A lower-than-expected increase in consumer prices in January suggested that the Fed still has more time to keep credit loose without risking serious inflation.

Looking ahead

The week after next will contain many of the February month-end economic reports, but we shouldn’t overlook the reports of the coming week. Housing continues to be a lagging part of the economic recovery and there will be a handful of reports on the market next week. At the beginning of the week, the Case-Shiller housing price index is expected to show that housing prices fell between 3.1% and 4.5% in December. Estimates for sales of both new and existing homes in January vary widely and reports could show continued declines or modest gains.

Notable reports for the week also include consumer confidence, initial unemployment claims, a revised reading of fourth quarter GDP, and a final February measure of the University of Michigan’s sentiment report.

Earnings will continue next week, but it seems unlikely that the releases will have an impact beyond the reporting companies.

Last week’s week-end news will likely set the stage for the market’s focus next week. The Fed’s move to raise discount rates should increase chatter around the central bank’s plans to tighten credit more broadly. To date, the Fed has outlined some of the methods it plans to use to tighten credit, but it has been reluctant to put any sort of timeline on its plans. The expected introduction of a financial overhaul plan from the Senate Banking Committee should also be a hot topic next week.

Unfortunately for me, Delta switched to a smaller plane.  They couldn’t get enough people to volunteer to skip the flight, so some of us lost our place on the plane.  This occurred even though I booked the ticket well in advance, had a confirmed seat and got to the airport in plenty of time.  In other words, I did everything “right” but, somehow, instead of boarding with my friends for the weekend, I had to cancel my vacation (Delta couldn’t get me out of KC until Sunday which defeated the purpose of going).

You’re likely wondering how in the world my experience could possibly relate to your retirement planning … Well, here goes (and please let me know what you think by commenting):

1)      You can’t control everything, no matter what you do –I learned the hard way that occasionally things happen that are outside of your control.  Similarly, many investors thought they were doing everything they could to prepare for retirement.  Then the market collapsed and many investors found out that losses can happen even if they were doing things “right” (more on this later).

2)      Although it’d be easy to say that I’m never going to fly on Delta again, it’s probably not realistic.  Similarly, many investors who saw large losses in their accounts probably thought about abandoning the market.  Emotional decisions like these often end up hurting the decision maker rather than helping.  Avoiding Delta all together might make me feel better for a while, but it could also cost me money and make my flights longer…  neither of which would make me happy.  Many investors hated to see their accounts drop, but saving for retirement in a diversified portfolio is still the most appropriate strategy for almost all of us.

3)      There is always more that you can do – Even though I thought I had done everything right, I realized after the fact there was more that I could have done.  I learned that I lost my spot on the new (smaller) plane because I was one of the last 12 to check in.  As a result, I’ll be checking in as soon as I possibly can which is generally 24 hrs before your flight.  Similarly, many investors thought they were doing things right simply by investing in their 401(k).  However, many investors did little beyond randomly selecting their investments without understanding what these investments were and how they would affect their long-term goals.

Saving for retirement is an ongoing process requiring you to be engaged in the process.  You not only have to think about what types of investments are appropriate for you, but also how much you should be saving.  Unfortunately, there is no such thing as a set-it and forget it investment strategy that magically gets you to retirement.

So what should you do?  Generally, the more you save the greater likelihood there is that you meet your retirement goals.  If you combine an appropriate amount of saving (aim for 10-15% of your income) with a diversified strategy you increase your chances even more.  And, if you don’t have the time to figure everything out, I highly suggest hiring an unbiased adviser to help with your retirement investment strategy.

So, while this experience lowered my confidence in Delta and made me want to do something that would make me feel better (in the short-term), I’m glad I took the time to reflect on the long-term effect of my actions.  If you’ve had similar thoughts about bailing on saving for retirement I encourage you to take a deep breath before making any emotional decisions that could have a long-term effect on your financial health.

If you’ve had an experience that made you want to make a short-term “feel good” decision let us know what you decided and what you’ve learned since making the decision.

Scott H

PS – Sometimes making long-term decisions is tough.  I’m in the process of rebooking my vacation for March and unfortunately the price of the ticket has more than doubled (my ticket for last weekend cost $240 while the ticket for my trip in March is now $521). OUCH!  Thanks again Delta!

A look at some of the market movers over the past week:

• European leaders promised to not let Greece fall under the weight of its credit crisis
• The Federal Reserve began outlining its exit strategy for its record credit expansion
• Former Merrill Lynch chief John Thain is set to take over at CIT
• SAP shook up its top level management

• Treasury Secretary Timothy Geithner defended the U.S.’s triple-A bond rating
• Troubles at small businesses could hamper the recovery
• UBS announced its first profit in more than a year
• Traders and hedge funds have set up a massive short position against the Euro
• Boeing completed a test flight with the largest plane the company has ever built
• Standard & Poor’s cut its outlook on both Bank of America and Citigroup
• Warren Buffett and Hank Paulson praised the government’s financial intervention
• One in five U.S. homeowners are now “underwater”
• Google launched a new service that will compete with social networking sites like Facebook, and announced plans to build high speed data networks
• CME Group purchased a 90% stake in the Dow Jones indexes business
• Euro-zone growth came in lower than expected
• Motorola announced plans to split in two
• Reports suggest that former regulators working for Toyota helped halt safety probes
• Mid-Atlantic states were clobbered by nasty winter weather
• Senate Democrats unveiled an $85 billion stimulus bill
• Berkshire Hathaway officially joined the S&P 500
• China unexpectedly hiked its reserve ratio
• Jobless claims fell by 43,000 from the prior week
• Retail sales in January grew more than expected

Commentary

Three out of the five trading days this week ended with the market lower, but at week’s end the S&P 500 had notched a 0.9% gain, reversing four straight weeks of losses. However, the gains weren’t quite enough to pull the index back into the black for the first couple months of 2010. Year-to-date the S&P 500 is down 3.6%.

As the list above suggests, it was a busy week for the financial markets and there was plenty of news to digest.

The Federal Reserve took front stage early in the week as Fed Chairman Ben Bernanke started getting specific on how the Fed would go about unwinding the massive monetary stimulus it’s used to jump-start the economy. Bernanke said that likely first steps in the process would be to raise the interest rate on banking reserves held at the Fed and use reverse repurchase agreements, which temporarily pull money out of the banking system. Bernanke also said that the Fed will likely begin testing these tools on a limited basis before it begins using them on a broader scale.

While Bernanke offered a bit more detail on how the Fed would go about tightening monetary policy, the when of the plan is still unclear. Thus far, the Fed has maintained that it would keep its accommodative policies for an “extended period.”

Like Dubai not all that long ago, Greece has jumped onto the financial world’s center stage as it struggles under a heavy debt load. Though the country represents a very small portion of the Euro-zone’s overall GDP, many are looking at the country’s struggle and the reaction from European leaders as a test of how well Euro-zone members will work together in this sort of crisis scenario. European leaders have so far promised that they wouldn’t let Greece fail, but details have been very sparse.

China also made some waves during the week as it raised banking reserve requirements for the second time in a month. The action is hoped to cool down lending in China and head off inflation and asset price bubbles. Though a healthy China that isn’t overheating is preferable for the rest of the world in the long term, there was a negative reaction to the actions as investors worried about the potential that China is already in a bubble and that slower growth in the country would impact other major world economies in the near term.

Coming back to the U.S., we can round out the week’s with some good news on the economic front. After some head-scratching employment numbers released last week, the drop in initial unemployment claims was a very clear positive indicator this week. Though this is a weekly reading and tends to bounce around, the drop let investors breathe a sigh of relief after the measure had shown unexpected increases in recent weeks.

Retail sales also provided a positive boost. January retail sales grew 0.5%, above the expected 0.3% increase. This has been a key focus point for many market analysts because of the huge portion of the economy that consumers account for.

Looking ahead

It will be a four-day holiday-shortened week next week as U.S. markets stay dark on Monday for the Presidents’ Day holiday.

On Wednesday the economic calendar will heat up with reports on housing starts, building permits, and capacity utilization. Also on Wednesday, the Fed will release the minutes from its most recent rate-setting meeting. Thursday will follow with initial unemployment claims, the producer price index, and economic leading indicators. Wrapping up the week we’ll see numbers on the consumer price index on Friday.

The most important economic releases are likely to be the Fed’s minutes, initial unemployment claims, and the consumer price index.

Earnings will continue to go strong next week with, of course, the exception of Monday’s holiday. Individual earnings reports are very unlikely to have an impact on the broader market though, as investors clearly seem to be looking beyond the current reports.

The market seems to have arrested the declines that started in mid-January. The question of whether the momentum reversal can continue next week will likely lie with investor sentiment along with the fate of Greece, news out of the Fed and the government, and evolving views on China’s current economic situation.

A look at some of the market movers over the past week:

• Former Fed Chief Paul Volcker made a case for stringent financial reforms
• Global semiconductor sales were up 29% year-over-year in December
• President Obama unveiled his $3.8 trillion budget proposal
• Bank of New York Mellon agreed to pay $2.3 billion for a unit of PNC Financial and PNC announced that it will repay TARP borrowings

• Moody’s issued a blanket warning for nearly 1,000 companies that will need to refinance debt in the coming years
• Google may be getting ready to escalate its battle with Microsoft
• Toyota’s recall may be just the beginning of its problems
• Ford joined Toyota in the penalty box by recalling 17,600 vehicles
• Moody’s warned on the U.S.’s debt rating
• U.S. auto sales increased in January
• UPS beat estimates and reported significantly higher profits
• Fury over AIG bonuses was renewed
• Monster Worldwide acquired HotJobs for $225 million
• Corporate bankruptcies climbed in January
• Bank of America executives were sued for securities fraud by the New York’s attorney general
• Goldman Sachs paid CEO Lloyd Blankfein significantly less than had been expected
• The U.S. unemployment rate fell to 9.7%

Commentary

Continuing January’s momentum, the market slumped again this week. Though three out of the five trading days ended in positive territory, a heady 3.1% loss on Thursday helped seal the S&P 500’s 0.7% loss for the week. The index is now down 4.4% year-to-date.

Early in the week there was much ado about the financial reforms and the so-called “Volcker Rule.” Specifically, on the table were the recommendations of former Federal Reserve Chairman Paul Volcker, recommendations that included splitting off proprietary trading businesses from the major banking institutions.

By most accounts, the testimony of Volcker in front of the Senate banking committee did not seem to get the support that would be needed to bring the rule into law. If the Volcker Rule does fade out, it is still unclear whether new banking regulations would really change the picture very much for the institutions concerned. For investors in banks and financials, this could be particularly good news.

More important to the markets, though, were the employment numbers released during the week. The reports culminated with the unemployment rate announcement on Friday, which came in at a seemingly optimistic 9.7%, down from 10% in the prior month.

The data, however, are not quite so clear. Non-farm payrolls actually declined by 20,000 during the month and the number of discouraged workers (the people that have stopped actively seeking employment) climbed. Seasonal adjustments played a big part in bringing down the overall unemployment level — the unadjusted unemployment rate rose from 9.7% in December to 10.6% in January. While the adjustment is reasonable considering typical seasonal patterns of employment, it can reduce the clarity of data.

Adding to that pessimism, and helping to drive the big loss on Thursday, was an increase in the number of new jobless claims. For the week, 480,000 workers applied for jobless benefits, up from 472,000 in the prior week and above the 455,000 expectation.

However, there is still room for optimism in all of this. While the continued high level of initial jobless claims is worrisome, the numbers remain well below what we saw during the worst of the recession. So at the very least we may be holding steady at a “less bad” level. A similar story could be told with the unemployment numbers. The raw data may be reason for pause, but the seasonally adjusted data is certainly encouraging. And though payrolls did fall in January, the loss still fits within a trend that could bring us to job growth in the coming months.

Earnings season continued during the week, but it might as well have been a footnote to the market action. Little notice was given to most of the major earnings reports and it appears that the market may already be looking past this earnings season.

Looking ahead

The economic calendar will be significantly lighter next week. In the early part of the week we’ll see wholesale inventories, the trade balance, and the treasury budget. In the back half of the week we’ll get initial unemployment claims, retail sales, and the University of Michigan consumer sentiment report.  After the question marks raised by the unemployment rate this past week, the initial unemployment claims will be in the spotlight next week.

Joining jobless claims in the spotlight next week will be retail sales and the University of Michigan sentiment report. Currently the market expects overall retail sales to post a 0.4% increase in January after a 0.2% decrease in December. The consumer sentiment report — which is an initial read on February’s levels — is expected to tick up to 74.8 from 74.4.

Earnings will continue in a big way through next week. However, it seems unlikely at this point that they will have much impact on the market. Thus far, earnings reports have been extremely positive, with nearly three quarters of profit reports exceeding analysts’ expectations. This, however, has not seemed to have any impact on the recent dour mood among investors.

With that said, the most important thing to follow next week will be broad investor sentiment. If sentiment hasn’t turned outright sour, excitement has at least cooled off significantly. The pressing question now is whether this means the market is taking a break before heading up further, leveling off to drift for a while, or preparing to make some sort of downside correction.

In most cases, there will be 5-10 investment companies to choose from, each offering several annuity or mutual fund products. A list of these companies can be obtained from your payroll or HR department.  The typical menu is dominated by annuity and mutual fund options offered through on-site salespeople. However, most employers will include at least one low cost option that does not have an on-site representative. These options will usually provide a good selection of investments at a relatively low cost but will not provide guidance on how to allocate your invested dollars among the available funds.

If your employer only allows you to invest in options that are offered by on-site sales people, ask a few questions before you invest. Most of these salespeople can provide access low cost mutual funds so be persistent in finding out all the options they have to offer. Try to find a fee based mutual fund platform with a wide variety of funds and an annual cost of 1%.  In addition, ask the sales person the following questions, two yes answers would be OK, all three would be best:

-Will my account be reviewed at regular intervals to ensure that it remains in line with my investment objectives?

-Will I be able to move my money out of this investment at any time, without penalty?

- Will you show me all the costs associated with this investment including your compensation in writing and explain each in detail?

The fees associated with an investment are one of the most important factors to understand. An additional expense of 2% can have a significant impact on your retirement nest egg. For example, a person saving $500 dollars a month for 30 years, earning an average of 8%, would have roughly $745,000. In contrast, if the return was lowered by two percent to 6%, due to elevated fees and expenses, the end value would be reduced to around $500,000.

If you select a provider with reasonable fees and high quality investments, , you are in a similar situation as the average 401(k) investor. The next task is deciding which funds are right for you and your investment objectives. A properly allocated portfolio will contain funds investing in bonds as well as stock in small and large companies, in the US and abroad.  If you’d like more information on how to allocate your account, consider either checking out this article or contacting an adviser at Smart401k.  We assist our clients select a 403(b) provider in addition to making a personalized, fund specific recommendation on how to invest your account.

If you have questions about your employer sponsored retirement plan, please feel free to contact our adviser team at 877.627.8401 or info@smart401k.com

Charlie Koch, Investment Adviser

A look at some of the market movers over the past week:

• Google’s co-founders registered to sell roughly five million shares
• Wal-Mart is cutting 11,000 jobs in its Sam’s Club stores
• TARP watchdog Neil Barofsky new investigations into the government’s handling of the AIG bailout
• The U.K. economy squeaked its way out of recession

• Apple’s fourth quarter earnings sailed past analysts’ expectations
• General Motor’s Chairman decided to take over the company’s CEO spot
• Toyota ordered the halt of sales for multiple popular models in the U.S.
• Berkshire Hathaway was added to the S&P 500 index
• Yahoo swung to a profit and reported better-than-expected results
• Apple unveiled its new iPad computer
• President Obama delivered his first State of the Union address
• The Federal Reserve kept its key rate steady
• Foreclosures continue to plague many areas of the U.S.
• Federal Reserve Chairman Ben Bernanke was approved for a second term
• Regulators shut down five banks, bringing the 2010 total to 15
• U.S. GDP grew at a 5.7% rate in the fourth quarter

Commentary

Capping off a rough January for stocks, the S&P 500 dropped 1.6% during the week. Small gains on Monday and Wednesday weren’t enough to offset larger drops towards the end of the week. By the time trading closed on Friday, the S&P had secured a 3.7% loss for the month.

Political news during the week included the Federal Reserve’s decision to keep interest rates steady and the confirmation of Federal Reserve Chief Ben Bernanke. Though the Fed continued to maintain that it will keep interest rates low for an extended period of time, the central bank also continued to express optimism that economic activity in the U.S. is picking up. This will keep the spotlight on the Fed and Bernanke as they try to balance the need to further stimulate the economy with keeping a lid on inflationary pressures.

Meanwhile, earnings continued to pour in during the week and much of the news was positive. Among companies that posted encouraging earnings were Texas Instruments, Apple, Yahoo, EMC, Verizon, AT&T, Caterpillar, and Ford. In addition, many of these companies also gave optimistic outlooks on the coming quarter, and in some cases, the coming year as well.

But the positive earnings numbers weren’t enough to turn the tide of the market. As a result, the main story for the week was the apparent growing disquiet among investors. The economy has made significant headway since early last year when we were still embroiled in the worst of the financial crisis. However, the market has also recovered significantly — even with January’s decline, the S&P 500 is still up 59% from the lows of last March. Many investors now seem to be questioning whether the strength of the recovery is enough to warrant the stock market moving even higher.

Looking ahead

With January coming to a close this past week, there will be plenty of economic news for investors to look forward to next week. Early in the week we’ll see data on personal income and spending, the Institute of Supply Management’s index, pending home sales, and auto sales. Later in the week we’ll hear about worker productivity, factory orders, and, of course, employment.

Employment continues to be a key indicator of the veracity of the recovery for many investors, so it’s very likely that this will be the key data to focus on next week. On Wednesday, ADP will release its report on payrolls and expectations vary from a decline of 40,000 to 60,000 following a drop of 84,000 last month. On Friday, we’ll hear the government’s numbers on unemployment. Current expectations are that the unemployment rate could have ticked back up to 10.1% in January.

Earnings will also continue in full force next week. Highlighting Monday and Tuesday will be Humana, Sysco, Aflac, Archer Daniels Midland, BP, D.R. Horton, Marathon Oil, MetLife, News Corp, Dow Chemical, Hershey, and UPS. Wednesday will bring Cisco, Honda, Pfizer, Time Warner, Visa, and Yum! Brands. And Thursday and Friday will close out the week with Clorox, Deutsche Bank, GlaxoSmithKline, Hitachi, Kellogg, MasterCard, Moody’s, Northrop Grumman, Toyota, Unilever, and Aetna.

But as we watched the market decline despite positive earnings last week, the key story for next week is likely to once again be investors’ sentiment and whether economic data is convincing enough that buyers will come back into the market. In fact, with a good deal of earnings already reported at this point, the market may already be looking past earnings season and focusing more on forward-looking indicators.

I’m a firm believer in the power of a vision because it creates inspiration and the framework for strategic planning.  Just as I feel that the Chiefs now have a vision and are starting to take steps to achieve that vision, I believe this approach is necessary in creating a successful investment strategy.  Too often I hear financial experts talk about their investment picks, training the average investor to think of investing in terms of what should I buy/sell vs. what goals do I have, and how do I best get there.

While investment selection is an important component of investment planning, there are a few steps that must be addressed first:

Create your vision. What are you saving for, college, retirement or something else?  Is it to fund your whole retirement or supplement other income you’ll receive?  What will your education costs be and when will you need to start using the money?  Just as a football program needs to realize where they want to be and when, it’s important to step back and understand what you want your investments to do for you.

Understand yourself as an investor. If there’s one thing I’ve learned about watching football over the years, it’s that the most successful teams have an identity.  Some prefer to play conservatively and manage the clock, while others attempt to score as quickly as possible and use more high-risk, high-reward plays.  This is due in part to preference, but also to what they feel are their strengths and weaknesses.  As an investor, you should evaluate how long you have to invest the money (time horizon) and how comfortable you are with market volatility (risk tolerance).   Try to identify any other circumstances that may influence how you invest, such as accessibility to your investments (liquidity needs).  Realize that there is a risk/return tradeoff.  Investments with the highest potential for long-term return generally come with the highest amount of risk.

Determine your asset allocation. At this point, a football team knows (1) where they want to go, and (2) generally what type of team they are.  Next, they start planning how they think they can best win the next game.  For you, that means determining what mix of investments is most suitable.  For someone close to retirement and more conservative, maybe it means 70% in lower-risk investments such as money market and bond funds and 30% in stock-based investments such as domestic equity and international funds.  On the other hand, someone in their 30s who doesn’t mind short-term volatility may want a mix of 80% stock-based and 20% lower-risk investments.

Select your investments. At this point in the process, you know what allocation mix is needed for your portfolio; the next decision should be which investments fit with your allocation mix and give you the greatest chance for success.  We look for certain criteria when choosing investments, including:  fund manager’s track record, performance vs. others in the same category, consistent returns, amount of risk each fund takes and expenses.  Because I know that I want to have 15% in international or 20% in large-company value exposure, I just need to select which funds I want to invest in within each of those areas.  Going back to my football analogy, a coach has many different types of plays they can run.  Based on their predefined game plan, they have the ability to select how they want to execute those to best defeat their opponent.

Monitor and evaluate your performance. In football, it’s pretty easy to gauge your performance —your win/loss record.  Evaluating your portfolio’s performance is a little more difficult.  A quick way to identify how your portfolio is performing is your personal rate of return.  This is typically found on your quarterly statement or on your retirement plan website.  Obviously, you want to see a positive return, but more importantly, you should compare your personal rate of return to how the overall market (such as the S&P 500 index) performed to give some perspective on what the investing environment was like during that time.  If you have a conservative investment strategy, you should ideally see your account lose less than the market in downturns; and while maybe not what’d you initially expect, it’s typical to see a conservative portfolio gain less when the market is going up.  Moderate to aggressive strategies will typically see performance similar to or more volatile than that of the overall market.  In addition, you want to periodically evaluate how each of your investments perform in relation to others in the same category.  If a fund significantly underperforms or outperforms in different types of markets, you should understand why (e.g. the fund takes a higher-risk approach).

Make adjustments. Football teams frequently make changes, either to their game plans or personnel, in order to stay competitive.  Just the same, any good investment strategy needs adjustments based on changes to your situation, changes in economic or market conditions and as funds fall in and out of favor.  It’s important that the changes are reflective of your overall, long-term vision and not the result of short-term, emotional decisions.

Will the Chiefs’ plan be successful?  Time will tell, but I feel improvement is in their near future.  While doing the steps above won’t guarantee your success, we believe your chances increase greatly if you adhere to a disciplined and long-term investment strategy.  If you find yourself getting stuck in any of these steps, please contact our advisers at info@smart401k.com or 877.627.8401.

Best of luck in 2010 and beyond.

Kevin Jaegers, Senior Investment Adviser

A look at some of the market movers over the past week:

• Hershey dropped out of the running as Cadbury accepted a buyout offer from Kraft
• Tyco acquired Brinks Home Security for $2 billion
• Japan Airlines became one of Japan’s largest bankruptcies
• The victory of Scott Brown in Massachusetts may put healthcare reform at risk

• IBM posted encouraging fourth quarter earnings
• China took further steps to cool growth and limit inflation dangers
• The World Bank provided a cautiously optimistic outlook on the world economy
• Metro-Goldwyn-Mayer may be preparing for a prepackaged bankruptcy and sale
• President Obama announced potential changes to the financial system that would limit size and risk-taking
• The government is considering whether to put Fannie Mae and Freddie Mac on its books
• Google posted better-than-expected quarterly results
• GE may be showing signs of stabilizing

Commentary

Three out of four trading days ended in the red for the S&P 500 –including a hefty 2.2% drop on Friday — and the index finished the week down 3.9%. After starting off the year strong, the S&P is now down 2.1% year-to-date.

While there was a hefty earnings calendar this week, Washington stole much of the thunder from reporting companies. The election of Republican Scott Brown in Massachusetts was seen by many as a signal for President Obama to put the brakes on spending in general. Though that may overstate the true significance of the election — and both sides are still debating that — the election does call in to question whether Congress will be able to settle on a healthcare reform bill.

Additionally, President Obama lashed out at the nation’s big banks again, this time proposing a number of new regulations that could force the banks into some tough decisions. Though details of the regulations are still vague, it’s expected that they would restrict deposit-taking banks from engaging in proprietary trading, put limits on their size, and force them to get rid of their hedge fund and private equity divisions.

In the midst of all of this, though, there were plenty of earnings reports hitting the wires. Citigroup, Bank of America, Goldman Sachs, and Morgan Stanley were among the major financials to report during the week, and for the most part they followed the model of JPMorgan. For Citi and B of A, both commercial and consumer lending continued to be sore spots. All four reports showed at least some slowdown in trading profits versus a year ago.

IBM’s results beat analyst’s expectations and pegged 2010 bottom line growth at 10%. American Express likewise beat expectations, and its management team expressed confidence in a continued recovery in the overall economy. In fact, it was a similar story among many of the reporting companies, including Google, Freeport-McMoRan, Unitedhealth, General Electric, and McDonald’s.

Looking ahead

We should expect to hear plenty more from Washington in the coming week. With the Massachusetts upset still fresh, speculation will continue over what the Brown victory means for both healthcare reform and the bigger picture. Meanwhile, with details about the President’s banking bombshell still sparse, investors and financial executives will be looking for more clarity from D.C.

It will be a much more interesting week on the economic front. Housing will take center stage early in the week with reports on existing home sales, new home sales, and the Case-Shiller home price index. Initial unemployment claims will be a notable report as they’ve been climbing more than expected lately and it’s anticipated that they’ll fall by as much as 32,000 next week.

Midweek, the Federal Reserve will meet to decide on the Federal Funds rate. As has been the case for a while now, the actual rate decision will likely be of little interest. Though there has been increased concern over the Fed’s eventual “exit plan” from its exceptionally low rates, the market still anticipates that the rate will stay the same at least through April. However, the commentary that the Fed provides with its decision will likely be closely watched.

Towards the end of the week we will see an advanced read on fourth quarter GDP and the University of Michigan’s updated consumer confidence index for January.

Earnings reports will be absolutely frothy next week. Kicking off the week on Monday and Tuesday, we’ll hear from Amgen, Apple, Eaton, Halliburton, Texas Instruments, VMware, Delta Air Lines, DuPont, EMC, Johnson & Johnson, Novartis, Nucor, Siemens, The Travelers Companies, United States Steel, Verizon, and Yahoo. Wednesday will bring BlackRock, Caterpillar, ConocoPhillips, E*Trade, General Dynamics, Norfolk Southern, Qualcomm, SAP, St. Jude Medical, Symantec, Boeing, UAL, United Technologies, Valero Energy, and WellPoint.

On Thursday the big name reports will be 3M, Altria, Amazon.com, AT&T, Bristol-Myers Squibb, Colgate-Palmolive, Danaher, Eli Lilly, Ford, JetBlue, Lockheed Martin, Microsoft, Motorola, Procter & Gamble, Raytheon, T. Rowe Price, Tyco, and US Airways. And finally Friday will close the week with Chevron, Fortune Brands, Honeywell, and Mattel.

If earnings reports next week follow in the footsteps of the reports from this past week, we should be in for more upside surprises. However, the more important issue for next week is how investors will react to earnings. Last week, whether distracted by the mixed picture at the big banks or the hoopla in Washington, investors largely shrugged off better-than-expected results from a lot of major companies.

A look at some of the market movers over the past week:

• Bankruptcy looks likely for Japan Airlines
• More bad news could be ahead in Dubai as Barclays won the first foreclosure case in the country
• Populist outrage is at a boil again as Wall Street banks get ready to dole out massive bonuses
• Continuing its efforts to stay on top of inflation, China raised banks’ reserve ratio

• Thanks to its economy-boosting efforts, the Federal Reserve posted a huge 2009 profit
• Aluminum producer Alcoa kicked off earnings season with a $277 million loss
• Google threatened to pull out of China after a highly sophisticated cyber attack
• The executives at major Wall Street firms faced tough questioning from a Congressional panel
• Foreclosures hit a record in 2009
• In its Beige Book report, the Federal Reserve noted continued economic improvement
• President Obama proposed a new fee on U.S. banks
• Chip-maker Intel reported strong earnings
• Retail sales posted a surprising 0.3% decline
• For the second time in a month, Johnson & Johnson issued a recall on Tylenol
• Earnings were strong at JPMorgan, though they painted a bleak picture of consumer lending

Commentary

After a strong start to the year, the markets cooled off a bit this week. The S&P 500 finished the week with 0.8% decline, thanks to moderate losses on Tuesday and Friday. The index is now up 1.9% over the first couple of weeks of 2010.

The major U.S. banks spent plenty of time in the headlines this week. Looking to collect the money that the government will ultimately lose on its TARP program, President Obama proposed a fee on major U.S. banks. While full details of the fee haven’t been released yet, it would levy a 0.15% tax on the balance sheets of companies with assets over $50 billion.

The executives at major banks such as JPMorgan and Goldman Sachs were also hauled in front of Congress in a continued effort to dig up the causes for the financial crisis. While this hearing was the stuff of good headlines and members of Congress had a chance to throw some harsh words in the bankers’ direction, little of substance was uncovered.

On the economic front, December retail sales jolted the market by coming in 0.3% below November’s level. Expectations had been for sales to increase 0.5% from the prior month. A variety of explanations were floated for the shortfall, including the winter storms during the month which may have kept shoppers away from stores. Despite the decline, many economists remain optimistic about the overall fourth quarter increase in consumer activity.

Earnings also kicked off during the week and it was a mixed bag. Alcoa was the first major report of the season, and the aluminum producer reported a GAAP loss that continued to demonstrate its struggle to regain profitability after the recession. On a non-GAAP basis, the company reported $0.01 in earnings per share, below the expected $0.06.

Later in the week, reports came from Intel and JPMorgan. Intel showed increases across the board and its $0.40 in earnings per share blew out the expected $0.30. Many observers noted that the earnings from Intel could suggest that the tech industry as a whole is recovering.

JPMorgan likewise produced impressive results, topping analysts’ $0.52 per-share profit estimates by $0.30. While the earnings looked good on the surface, many experts highlighted the fact that much of the bottom line came from investment banking and trading activities, while the company’s consumer lending segments continued to struggle.

Both Intel and JPMorgan’s stocks declined after earnings, potentially sending a warning signal that investors may be getting more cautious despite strong earnings results.

Looking ahead

It will be a holiday-shortened week ahead, with the markets on break Monday for the Martin Luther King Jr. holiday.

The economic calendar for the week ahead will be relatively light, with housing starts and initial unemployment claims likely the most notable reports.

There won’t be a dearth of information for investors to take in though, as attention will continue to hone in on the steadily-growing list of companies reporting earnings. On Tuesday and Wednesday we’ll see reports from Citigroup, CSX Corp, IBM, TD Ameritrade, AMR Corp, Bank of America, Bank of New York Mellon, Coach, eBay, Morgan Stanley, Starbucks, U.S. Bancorp, and Wells Fargo.

Thursday will bring American Express, Capital One, Comerica, Continental Airlines, Freeport-McMoRan, Goldman Sachs, Google, IGT, KeyCorp, Legg Mason, PNC Financial, Southwest Airlines, UnitedHealth, and Xerox. BB&T, General Electric, Harley-Davidson, Kimberly-Clark, McDonald’s, Merck, Schlumberger, and SunTrust finish out the week on Friday.

Earnings season is still wide open in terms of how company earnings will shake out and, maybe more importantly, how investors will react to the reports. The latter could be worth keeping a close eye on next week, particularly considering the lackluster reaction to the earnings from Intel and JPMorgan this past week.

A look at some of the market movers over the past week:

• Novartis set the wheels in motion to buy the rest of Alcon
• Warren Buffett made waves by speaking out against Kraft’s battle to acquire Cadbury
• In the wake of the financial crisis the banking landscape in the U.K. continues to shift
• Credit Suisse became the target in a $24 billion lawsuit over its lending practices

• Personal bankruptcies rose substantially in 2009
• Google officially launched its Nexus One smartphone
• Auto lender GMAC is expected to post a massive fourth quarter loss
• Auto sales posted impressive gains in December
• Senate banking committee chairman Christopher Dodd announced that he will not seek re-election
• December retail sales posted a 2.9% increase from 2008
• The New York Federal Reserve came under fire for instructing AIG to remove specific language about swap settlements from a post-bailout press release
• According to Federal Reserve meeting minutes, some FOMC members think more aid will be needed
• China took steps to address potential inflation as its country emerges from the global slowdown
• December’s jobs report came in worse than expected and kept the unemployment rate at 10%

Commentary

How much can we infer about the coming year from the first week of trading? The more the better, as the S&P 500 started off the new year with five straight up days and an impressive 2.7% gain.

The week started out with a few very positive economic reports, including better-than-expected reports on the Institute of Supply Management’s main index and factory orders. A big drop in pending home sales took some air out of the market, but the mid-week employment report from ADP offered another boost as the reported 84,000 job cuts were better than some experts had anticipated.

The rest of the week was mainly preparation for the end-of-week jobs report, which was expected to show zero to 25,000 job losses in December. When the numbers came in though, the 85,000 drop in employment surprised many analysts. Not only was the number well above expectations, but it came on the heels of an adjustment to November’s jobs report which now shows that 4,000 jobs were added in that month.

While the unemployment rate held at 10%, that was due mainly to the fact that many more Americans took themselves out of the labor force by discontinuing their job hunt. The underemployment rate, which includes those who want to work but have either stopped looking or have taken on part-time work, rose to 17.3% in December, up from 17.2% in the prior month.

Some observers have been quick to report that the week in which the numbers were gathered — the week of December 7th — was a particularly cold one, which could have led to an unusual number of firings in outdoor industries such as construction. Whether or not this is the case, the worse-than-expected numbers have put even more attention on the importance of revitalizing the job market.

Also notable during the week was the release of minutes from the most recent Federal Reserve policy meeting. While much of the discussion centered on improvements in the economy, there was substantial talk about the troubles in the labor market and most of the members of the Fed seem to expect a slow employment recovery. The lackluster employment numbers for December will likely be a key point of discussion during the Fed’s next meeting.

In addition, the members of the Fed discussed the outlook for housing. While the consensus was that housing appears to be on firmer footing, there was concern over the eventual expiration of the government’s home buyer tax credit, as well as pressure from mounting foreclosures. Some members suggested that the Fed may have to step back from its planned reduction in monetary stimulus if housing starts to hit the skids again.

Looking ahead

Next week will bring a handful of notable economic reports to the market. By midweek we’ll have seen the Fed’s Beige Book report, and then in the back half of the week retail sales, the consumer price index, the University of Michigan’s consumer sentiment report, and initial unemployment claims will hit the wires.

But there’s only one word you really need to know for next week, and really the next few weeks to come: earnings.

On Monday, Alcoa provides the official kick-off to fourth quarter earnings season. Analysts expect that it will report a $0.06 profit per share after losing $0.28 per share last year. Overall, next week’s earnings calendar will be pretty quiet. Besides Alcoa, Linear Technology and Supervalu are the only reports that will be halfway notable.

However, much of the market chatter will begin to lock onto upcoming earnings reports from everyone from IBM (January 19th) to Caterpillar (January 26th) to UPS (February 2nd). And even though we have to wait a couple of weeks for many of the biggest earnings reports, many companies may begin coming forward with pre-reports to prepare investors for what’s to come.