Historically, September and October have been the worst performing months of the year. Frequently, during the month of October, investors have experienced considerable pain. Not the case this year . During September, the Dow Industrials gained 2.62%; October saw the Dow advance by 3.44%. The S&P 500 posted similar gains. Considering the consensus view that the economy is slowing, the market’s performance, while welcomed, is a bit confusing. The market’s recent performance prompted former Treasury Secretary Robert Rubin to comment:

 “I think there’s been a curious phenomenon in the equity markets, at least in the last few months: When there is news that the U.S. economy  is slowing, the market often gets stronger because investors figure the Fed will stop raising rates, or maybe lower rates….or maybe they think yields will decline. For some reason, they don’t seem to say to themselves that earnings may be lower. I think it’s very strange.”

  After three trading days into November, the euphoria of September and October has dimmed a bit. As of the close Friday, the Dow Industrials have posted six straight down days. In fact all of the major stock averages were down for the week. The Russell 2000 (Small Stocks) declined by the widest margin, but the Dow Industrials was the only major average that lost ground every trading day this week. The sixty-four thousand dollar question is…… Are we seeing the beginning of a major market correction?

 I read an article the other day that stated, “ China’s Dollar reserves are approaching $1 trillion ”. Where did China get all those dollars? Of course that is not hard to answer… China, along with many other exporters, sell things to Americans. If the world trade was balanced and free, exporting countries like China could not build up huge U.S. Dollar surpluses. Foreign surpluses have become so great that Foreigners now own 43% of all marketable U.S. Treasuries, 32% of U.S. Corporate bonds, and 16% of all U.S. stocks. America now runs a trade deficit that is nearly 7% of our Gross Domestic Product. Former Fed Chairmen Alan Greenspan once said that it is dangerous for the trade deficit to exceed 5% of GDP.

 Kate “Short Fuse” Incontrera is a staff writer for The Daily Reckoning . Last Friday, “Short Fuse” addressed the issue of the seemingly confusing statements we have recently been hearing and reading relative to the state of the economy. I think you will find her comments interesting.

VIEWS FROM THE FUSE: PUT ON YOUR CRASH GEAR FOR THIS SOFT LANDING

 If you are like us, you have probably been a little confused by all the contradictory statements we've been getting lately about the current state of the U.S. economy. Just take a look at these headlines from this past Thursday and Friday:

"Greenspan Sees A Soft Landing"... "New Home Price Plunge Biggest Since 70"... "The Bubble-Proof Economy"... "Economy Weakest in 3 Years"...

Hmmm...hard to decipher what's really going on, no? Well, why don't we ignore the headlines and just look at the facts...

First up, housing. The mainstream press has finally acknowledged that we may have had a tiny bubble in the housing sector on our hands, but most refuse to believe that this will have a major effect on the economy. And why should we even worry? The Maestro himself, Alan Greenspan, announced - good news! - we are out of the woods as far as housing is concerned.

We weren't aware that we had even fully entered the woods yet, but according to Greenspan, "Most of the negatives in housing are probably behind us. It's taking less out of the economy."

These comments from the lovable ex-Fed head came right after a barrage of data pointed us in the opposite direction. In September, new home prices took their biggest hit since 1970, tumbling 9.7 percent from last year.

Not only that, but home sales have slipped for the sixth straight month.

Since everyone and their pizza delivery boy seems to have purchased a home in the past few years, homebuilders are having a pretty tough time unloading new homes, despite all the incentives they are offering.

And unfortunately, foreclosure rates are soaring all over the nation.

Sub prime borrowers are having a hard time keeping up with their payments due the interest rate hikes of recent months. In addition, Lou Barnes, a mortgage banker with Boulder West Financial Services in Boulder, Colorado, reports, "Overbuilding has dampened price appreciation, which has contributed to high foreclosures in those areas because homeowners have less equity and aren't able to sell quickly."

But not to worry. Greenspan assures us that "A lot of people are going to lose their homes. It's a family tragedy. It's not an economic - or macroeconomic - tragedy."

Well, let's see. Has housing really had any effect on the economy?

CNNMoney.com reported on Friday that the economic growth slowed to the weakest pace in more than three years in the third quarter, as GDP, the government's main gauge of the strength of the economy, came in much lower than analysts had forecast.

The Commerce Department reported that GDP grew at 1.6 percent in the third quarter, down from the 2.6 percent rate in the second quarter. This weaker growth was partly due to a rising trade gap (which subtracts from GDP), as well as the cooling housing sector and weaker consumer spending.

Even so, some economists are arguing that the "threat" of a housing slowdown has been exaggerated (not by your friends at The DR, of course...we hate hyperbole).

"It's a bee sting, maybe a couple of bee stings," said Robert Brusca of FAO Economics. "Yeah it hurts, but there hasn't been the allergic reaction many feared would cause worse problems."

While many argue that housing has hit the bottom already, via a 'soft landing'; here at The Daily Reckoning, we think we still have a ways to fall. Of course, we don't have a crystal ball, but we would get the crash gear on - just in case.

OK so here are the questions:

• Does it matter that our countries deficit is now over $8.4 TRILLION????
• Does it matter that our trade deficit is 7% of the GDP or all the goods and services produced in the US???
• Does it matter that over 43% of our government’s debt is to foreigners?  It reminds me of the proverb-the debtor is slave to the creditor.
• Does it matter that foreigners own 32% of all our corporate bonds???
• Does it matter that foreigners own 16% of US stocks???  Should make for some interesting shareholder meetings when the foreigners want something that could hurt us as US citizens.

Have a great week.

Robert Matheson
Matheson Financial Services
239-403-8727

Matheson Financial Services
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Robert Matheson, Registered Investment Advisor, CPA*, CFP®, CEPP
*Registered in Florida and Minnesota

The information and data contained herein has been obtained from sources believed reliable, but is in no way guaranteed by Robert Matheson or Matheson Financial Services as to its accuracy.  Furthermore, this report is provided as a complimentary service by Robert Matheson and is not a solicitation, or an offer to buy or sell any security, mutual fund, commodity or any other product mentioned in this or any other report.  Past performance does not guarantee future results.