First Qtr 2011

Spring is in the air, Tax Day has come and gone and the economy is growing!

The economy is growing ever be it so slowly, but at least it’s getting better. The US stock market had its best 1^st quarter since 1998 with the Dow gaining +6.4%, the S&P 500 +5.4%, Nasdaq +4.8% and +7.6% for the Russell 2000. The S&P has rallied in seven of the past eight quarters and is up +26% since August 30 when the Fed announced its new quantitative easing program (QE2).

To highlight the positives….Employers added 216,000 jobs in March and unemployment is at 8.8%, a two year low. Friday’s Consumer Price Index report showed that consumer confidence rebounded more than expected in early April.  Corporate America’s first quarter earnings reports are just being released and so far it is a mixed bag of results.

The markets seem to be discounting the bad news and the US economy won’t really take off until we get more folks back to work and they feel secure in their jobs and benefits. Even though unemployment is under 9%, there are over 13 million men and women out of work (6 million of them have been jobless for 27 weeks or more) and the job market is as bad as it gets for this year’s graduating class. Our country along with so many states have budgets that are a mess, the US alone is $14 trillion in the hole and Washington wants to increase the debt ceiling (kind of like the American people asking for a larger line of credit).

Being bullish has paid off since the markets doubled from their lows hit in March 2009 and I am still optimistic looking forward, but feel it’s time to be cautious as well. As I rebalance our portfolios, I am invested more in US stocks than Europe (because many European countries have bigger problems than the US) and I still favor emerging markets even though they have lost ground over the past several months. Interest rates are still low, near zero for short-term bonds or CD’s, and I have been paring down our exposure to US Treasuries and favor  corporate bonds, floating-rate income funds, emerging market debt, Large-Cap value stocks paying dividends more than the coupon on a 10 year bond and a few bond funds with good management like PIMCO and DoubleLine.  The area that I have been adding to is our alternative assets (commodities, precious metals and real-estate).

The US and most other countries around the world have been printing money to stimulate their economies and it’s just a matter of time until inflation rears its ugly head.  We already see it in the price of groceries and gas, but the Fed feels consumer prices (minus food and energy) are holding steady and because so many people are not working or spending money to fuel the economy they won’t be raising interest rates anytime too soon. Commodities can serve as a shield from any portfolio when inflation does come around.

The world’s population is expected to grow from 6.7 billion people today to over 9 billion by 2050 according to the World Bank. Many of our natural resources are at record high prices, so while demand for raw materials is growing, unfortunately supplies of crops, water, energy and metals are becoming scarcer. Think about this one fact, freshwater is less than 3% of the Earth’s surface water and there is no known substitute for this irreplaceable commodity.

So why invest in alternative assets now? Rather than swing for the fences and try to maximize returns by investing solely in stocks and bonds, I feel that some of these alternative assets might make sense long-term and can act as a hedge if things get worse.  My belief is that with the world in this precarious predicament, it’s prudent to have a well balanced portfolio allocated towards many sectors.