2010 Year End

Here’s to the bright New Year, and a fond farewell to the old; I extend to you my best wishes for perfect health and a fulfilling new year!

While 2010 ended in positive territory for the major indices, the ride was anything but smooth. The May 6th “flash crash” and continued worries over European debt spooked investors, while a new $600 billion stimulus plan from the Federal Reserve, and improving economic data helped the market recover from a summer slump.  Stocks ultimately reached highs not seen since before the fall of Lehman Brothers in 2008. The Dow gained 11.02 percent for the year with nearly half of the gain, 5.2 percent, occurring in December (the best December in seven years). The S&P rose 10.2 percent in the fourth quarter, 6.6 percent of which occurred in December, finishing out the year a positive 13 percent. While the Nasdaq finished 2010 with 17 percent increase for the year.  Our returns prove that it paid off for investors to stay the course and not be distracted by all the noise in the headlines.

With 2011 already upon us, I remain optimistic that the US economy will continue to grow.  Although the unemployment rate fell by 0.4 percentage point to 9.4 percent in December (the lowest since May 2009), employment rose just 103,000; not exactly the boom economists hoped for.  Nonetheless, average monthly private payroll growth in the fourth quarter was the strongest in nearly four years.  The economy is growing although slower than hoped for.

The key question now is when will inflation rear its ugly head and facilitate the Fed to raise rates? It’s my opinion that inflation will remain stable so long as unemployment remains high and those who have jobs are worried about having their hours, benefits and/or pay altered.  As countries continue to ‘stimulate their economies’ by uninhibitedly spending money, thus going deeper in debt, I am worried about the repercussions and when we will feel their effects.

Some clients have asked me why I like investing overseas. The NYSE and Nasdaq stock exchange are, respectively, the first and third largest in the world by market capitalization and comprise approximately 33% of the total global stock market value. The US stock market, especially large-cap companies, earn over a third of their revenue overseas. The Tokyo Stock Exchange has the second largest market capitalization. The remaining seven are Euronext-Europe, London, Hong Kong, Canada, Brazil, Spain and Germany. The top ten stock exchanges in the world (including US) account for 65% of the global stock capitalization.

If you were to measure the US as a % of GDP (gross domestic product)  and its purchasing power around the globe, it now accounts for 43% of the world’s pie (compared to 70% at one time)  with foreign developed markets at 45% and emerging markets representing 12% and growing strong.  To summarize, non-US markets make up 54% of total global market capitalization, 95% of the world’s population and over two-thirds of world economic output as measured through GDP. This is why investors should own international holdings.

I continue to like emerging market countries especially China, India and Brazil that are growing faster than any other county, even though they look a bit frothy at their current levels. China’s growing need for coal and iron ore should be a plus for Australia’s mining companies and its economic growth, which is why we are investing in Australia and other Pacific Rim countries. Frontier markets; which represent approximately 1% of the entire international equity universe, tend to be developing countries with high rates of economic growth and small, relatively illiquid, stock markets. Africa for instance, is rich in natural resources with 13% of the global reserves for oil, 50% of proven gold reserves, 60% of cobalt and 90% of the platinum reserves to name a few.

Most investors feel that fixed income is a safe investment but with interest rates near zero, Treasuries may be more volatile than other type bonds. In this environment I like corporate bonds (investment grade and high-yield), munis and floating rate bank loans.

I continue to look for Alternative Assets that do not have a high correlation to the US stock market. The most obvious holding that investors want us to buy is gold which gives me the most concern. Gold has done extremely well but not as a hedge for inflation or its use as a metal; rather folks have been speculating that the world is going to fall apart which is why they are hoarding it. Other than gold, there are precious metals such as, silver and palladium, which we find more appealing.  REIT’s (Real Estate Investment Trust) have done well because of their dividend and capital appreciation, and two other areas that we are looking to gain from are energy and agriculture, due to the price of gas and food increasing.