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Folks will remember way back in October 2007 that euphoria was abounding with the Dow hitting 14,000. All we heard was that things just arent that good, Bear Stearns had failed, some hedge funds were in trouble, GM was teetering on the verge of bankruptcy and things just didnt seem right to most people. Even so called market experts were wondering why the markets kept climbing. As 2007 ended, the markets did fall off, but not that much. The markets didnt seem to understand.

Well into 2008 when the Dow continued to hold its own all the way through August, even with layoffs beginning and other financial firms failing, the markets seemed to be oblivious, or at least hopeful that this financial hiccup was temporary.

Then Lehman failed, AIG was bailed out, Washington Mutual barely got bought, and you know the rest of the drill. Oh, and we had an election. Well, as the markets plummeted, they seemed to have come to understand the gravity of it all. That was until March, when the Dow dipped to 6,500. Now that really got peoples attention and even though as I inferred, up until that point, the markets seemed to have a decent understanding of the situation, this went a bit far. So, I would say, the markets got it wrong.

Fast forward to late 2009. The markets, for lack of a better term, have been on a tear. From that 6,500 level to recently hitting 10,100; an admittedly phenomenal run. All year long, we heard that this cant be, the markets are ahead of themselves, etc. I have to say that to some degree, I agreed, but yet, the rally continued through the summer, and into fall.

Finally, last week, the market got it. On Thursday, the Treasury announced that the 3rd quarter GDP (remember that 2 consecutive quarters got us our recession) grew by 3.5%. The markets met this news with glee, with the Dow moving up 199 points. However, questions started to immediately arise about the validity of the number and the components thereof. Specifically, it seemed that the general consensus was that a great part of the 3.5% growth was attributed to Cash for Clunkers, plan, which in my opinion, even though it helped move cars out of showrooms, was basically a failure. So, investors began to digest that fact and also that as bad as the recession had been, usually, the first quarter of growth is even more robust. Take those two factors together and you have a tepid quarter to say the least and finally, as the markets digested this as well, they began to get it right.

On Friday, the markets plummeted, giving all of Thursdays gains and then some. Also, as Americans went Trick or Treating, more news about the shakiness of any recovery was breaking including that more banks failed and CIT filed for bankruptcy. Folks, things really arent that good yet and might not be for some time. Thats not to say, we are going to revisit fall of 2008, but we are not done with tough times. Its sort of like being behind in a football game 20-0 and just scoring a touchdown to make the game closer and give your team a chance, just to have several of your players injured, the weather turn bad and the other teams best player returns from his injury. You get my drift. Its never easy, but coming out of this recession with everything thats going on will be a challenge. Ill end this newsletter with a brief list of headwinds any recovery will face.

Health Care Reform or lack thereof

If any significant legislation passes, the tab to taxpayers will be tremendous. It will become a sure thing that Federal income tax rates will go up by no small measure and the threat to the deficit will weigh for generations to come.

Potential 2nd Stimulus Bill

While debate rages as to whether the first stimulus bill has worked, a second one is at least being considered in Congress. Again, if it is determined to be necessary, this is another front-end loaded government expenditure for which the bill will come due.

Direction of the Federal Reserve

Interest rates are as low as they get and talk has begun that it may soon be time to begin raising interest rates. This is all well and good, but the real risk is that they are raised to far, too fast. We dont yet have inflation, in fact, we sort of have deflation. But, that will be the beast which the Federal Reserve tries to tame. Keep an eye on Mr. Bernanke & Co.

Federal Income Tax Rates

Many of the Bush tax cuts are set to expire in 2011, if Congress doesnt act. Congress is good at not acting, especially if they smell a source of revenue. So, it is a good bet that those tax cuts will expire, leading us to higher income tax rates. This alone could choke off any recovery. Again, a wait and see attitude here, unless we have a 2nd Congressional Revolution like that in 1994, when the Republicans re-took Congress in Bill Clintons second year. If that happens, perhaps those tax cuts wont completely expire.

Housing Markets

Last but not least is the housing market, which many will agree is showing signs of stabilization. However, there are still many foreclosures not yet on the market and also short sales which will take some time to work themselves off the market. Credit is still tight and although rates are low, they wont stay that way for much longer and when they start rising, potential buyers may be out of luck. On the plus side, the Congress voted to continue in some form the $8,000 credit for some homebuyers so hopefully, this may help.