Second Quarter 2011 Market Analysis

Posted by David Fevergeon - June 16, 2011 - Market Analysis - No Comments

Over the last several weeks, I’ve heard several commentaries offering their forecasts for the direction of our economy.  In April, I had the opportunity to attend a conference sponsored by Curian Capital Management in Newport Beach, CA.  The event was held at PIMCO’s home offices and featured presentations from several of their top investment analysts.  At one point, we even had a surprise visit by Bill Gross, fund manager of the PIMCO Total Return Fund (the largest bond fund in the world).  Bill discussed the Fed’s current low interest rate policy, a strategy Bill calls, “Financial Depression.”  Financial Depression occurs when interest rates are kept lower than the actual rate of inflation.  By so doing, the Federal Reserve hopes to grow its way out of our tremendous national deficit.  This strategy ultimately causes a devaluation of our currency which may lead to higher future inflation.  As such, the PIMCO fund managers are finding value in holding real assets like precious metals, energy stocks, and commodities.  These assets can help hedge against a weakening dollar.  Although the U.S. dollar has recently rallied due to renewed concerns over debt problems in Europe, PIMCO’s management believes the dollar will continue its devaluation over the longer-term.

One of our other investment partners, CLS Investment firm, recently held their quarterly investment committee meeting.  At the meeting they discussed possible outcomes for the economy over the next three years.  As these findings were quite consistent with PIMCO’s analysis, I thought it would be helpful to share some of their predictions for the next few years.  In particular, CLS outlined what they thought would go right, and what could possibly go wrong in the years ahead.

2011 Outlook: The economy gradually slows as the year progresses.

This prediction may already have begun to take place.  From April 29th, 2011 through June 10th, 2011, the S&P 500 index was down 6.6% due to a series of worse-than-expected economic data.

What could Go Right? What could Go Wrong?
Employment is rising QE2 ends and the economy slows dramatically
Retail Sales Rising Oil Rises above $120.00
Leading Indicators Rising U.S. Dollar Collapses
No Signs of Turmoil in the Bond Market Interest Rates Rise more than 1.25%
The government “talking” about deficit reduction Stock Prices correct more than 15%


2012 Outlook:  Economic Growth Accelerates

What could Go Right? What could Go Wrong?
Leading Indicators are correct Oil Rises above $120.00 per barrel and stays there
Oil doesn’t exceed $120 until 2013 Consumer Price Index registers more than 4% inflation
Employment continues to rise U.S. Dollar Collapses
Non-residential construction recovers Interest Rates Rise another 2%
Money Supply growth excites retail activity Housing Situation worse than expected: recovery doesn’t begin.


2013-2014 Outlook: Recession

Factors that could contribute to the Recession:

  1. Accelerating inflation puts a halt to any more quantitative easing
  2. Oil rises above $140 per barrel
  3. Interest Rates continue to rise
  4. Taxes are increased as Bush Era Tax Cuts expire
  5. Financial Pressure and large worldwide deficits take their toll

As you review the information above, please keep in mind that nobody holds the magic crystal ball to predict if, when, or how these events will take place.  Please be sure to give me a call if you would like to review how your investment portfolio is positioned to not only meet your investment goals & risk tolerance, but hedge against some of the challenges facing our economy today.  I look forward to hearing from you.



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