December 2010

A Tell-Tale Year

Despite an overbought and thinning market, the S&P 500 charged ahead in December, rising 6.68% and concluding 2010 with a very respectable 15.05% gain. I'm pleased to report our results on our performance page. I mentioned in an earlier note that our accounts were a little out of sync in December, as defensive issues outperformed cyclical growth, and so the question becomes whether this was an anomaly or the start of a new longer term trend. I believe it was an anomaly, but if not, we'll adapt, as it is okay to be wrong but not okay to stay wrong. Here are my initial thoughts on what to expect in 2011, and as usual are derived to a large extent from my two main sources of research: The Bank Credit Analyst, and Lowery Technical Analysis. 

• The market is ripe for correction as a result of investor complacency, extended prices, and selective buying; however, the long term technicals continue to improve and point to another positive year for the equity markets.
• First time in history that oil consumption in Emerging markets is greater than Developed countries (source Marc Faber). This fact combined with flattening supplies should bode well for oil pricing.
• Concerns over European debt (club Med countries plus Ireland) and durability of US economic expansion should abate, and allow investors to start focusing in on positive company fundamentals.
• Monetary policy remains highly accommodative which should keep short term rates quite low. With low corporate default rates, this is a positive for corporate bonds and particularly for high yield bonds where interest spreads have room to narrow.
• Municipal bonds are attractive at current yield spreads to Treasuries, and despite the financial troubles of certain states, they have to balance their budgets every year, and muni debt interest is a rather small portion of this expense.
• Emerging market currencies should remain firm and add to the attractiveness of Sovereign debt (ESD, FAX, EDD).
• In addition to oil, commodities should remain firm as a result of bullet point number two; gold has not peaked, but perhaps becomes more volatile with a false sense that the dollar will improve over the longer term.
• Emerging equity markets should continue to outperform with a bubble possible should all the loose money slogging around start to gain traction.

For those who think the super debt cycle is over versus those who believe that the current quantitative easing will put the economy back on track, 2011 should be a tell-tale year. I personally believe that the easing will work over the intermediate term, but unless Congress gets its act together in reducing debt, I'm afraid we'll be addressing these same issues a few years down the road.

 

-Joe