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Your investments and the economy
By Michael Sean Comerford | Daily Herald Staff
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Published: 10/20/2007 11:26 PM

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Is the market currently undervalued?

"The financial markets have shown a very nice recovery since their lowest moments in August. We've seen reduced trading volatility. Equity indices have reached new record levels. And some of the spreads between interest rates, that we watch closely, have gotten back to norms."

What's the current psychology of the market?

"As (last) week's performance suggests, investors aren't entirely comfortable that the crisis is over … there are still risks in the system and that the Federal Reserve may still have to ease (interest) rates further in order to address them."

Is oil going to hit $100 a barrel and how does that affect gas prices?

"With oil prices at $88 a barrel, it certainly isn't going to help consumers as we head into the fall heating season. Pump prices, ironically, have been easing a little bit, teaching us once again that it is not necessarily the raw material but the refining of the raw material that can be especially costly or cheap."

Why were the most popular mutual funds in the third quarter so heavily invested in foreign shares?

"I think in the past year it has been especially important because, in general, foreign economies have been growing faster than ours has. And that has been reflected not only in a movement of portfolio weights, our trade deficit has actually narrowed because the weak dollar has allowed us to sell better overseas."

Do you see inflation on the horizon?

"Inflation seems to be in reasonable control … There are inflation risks that, kind of, need to be followed. One is the dollar, because imports cost more. Another is energy and other commodities, which are quite expensive. And then third is wages. We do have a tight labor market. We are seeing wage growth."

What should average investors be watching this week?

"We will get a new round of home sales information, which we're all watching. I believe that there is going to have to be some additional discounting of home prices before they get into the range of buyers. What we're going to have to watch for in the fourth quarter is if the moderation of home prices, and in some cases the decline, will affect consumer spending and also potentially create more problems for the credit market."