Greece; Throw Them Out

 The Greek debt crisis blind-sided U.S. investors who spent most of 2011 trying to avoid the affects of a potentially bankrupt country.  Rather than allowing shameless spending and reckless management derail a rising U.S. market, investors vowed to turn away from the constant vacillations of what seems like a never-ending drama (by the way, Drama is the eponymous city in Northeastern Greece).  Ostensibly, it appears that a solution is forthcoming.

 Download the February 21st Market Perspectives

When investors start getting “too comfortable” with the market’s tone, defense is often the best strategy. Since turning the corner into 2012, momentum for stocks has continued; most indexes have climbed effortlessly to unrealistic levels.  That’s not to say that stocks are overvalued using current valuations and compared to bonds.  Rather, it appears that investors have become complacent.  The huge market move following the recent January payrolls report (the S&P 500 shot to 1344) was followed by two lackluster days at the end of last week.  So where will the market get sustenance to move higher?

Since year end 2011, the S&P 500 has been in a steady climb and recently wrapped up the best January performance since 1997; that year the index recorded a 6.1% gain in January.  The 4%-plus gain in the first month of 2012 gained ovation from investors and the momentum appears to be continuing.  What is goosing the markets so far this year, and for that matter since October 2011?

Holding rates at record lows could ignite inflationary pressures over the next 18-24 months.  This would further complicate our languid recovery.  In the wake of the latest assertions by the Fed, we now anticipate stable bond yields through 2012 with a bias toward slightly higher rates at the end of 2013.  In spite of the risk-on sentiment of late, bonds continue to be a safe haven for investors around the globe.  Therefore, current pricing appears to be increasing in risk without commensurate reward potential.  Given the continued headwinds (primarily out of Europe) and mixed signals from the latest GDP reports, it may be hard to convince investors to leave bonds, at least for now.

We expect interest rates to stay below historical spreads versus inflation for the foreseeable future.  Debt instruments will continue to be a popular choice but that doesn’t justify buying overpriced bonds.  In our view, corporate bonds as well as select short-term foreign-government fixed-income securities represent greater value with less risk when compared to Treasuries. Considering the low level interest rates, as well as previously mentioned items, we anticipate reducing our fixed-income securities by as much as 40% from current allocations.

Nearly a year ago, it appeared the Fed had fired its last bullet to prop up the ailing economy; QE2 came to a close.  Today, Fed officials maintain that more ammunition is available and will be used as needed.  The latest shot came last week as Fed Chairman Ben Bernanke repeated his December 2011 statement with one small exception…

Year-to-date 2012 is looking good and investors are maintaining their “feel good” attitude. According to the American Institute of Individual Inves-tors (AAII), investor sentiment remains bullish though we note the bull-bear spread has come down slightly since the January 12th reading. Still, it remains the highest in more than a year. This kind of one-track thinking among investors is nothing new, but that doesn’t mean they are right. After all, pretending you don’t have a problem won’t make it go away. Lest those bulls forget; we still have some serious headwinds. Trouble is, for most of January, investors have suddenly started ignoring that little problem across the Atlantic and ostensibly believing that America has outraced the possibility of slowing corporate profits among other challenges. Regardless of investor sentiment, we will look to metrics that don’t rely on emotion; global growth estimates, bond spreads, legal insider trading (corporate executives buying their company stock) and technical analysis….

By early February the 4th Quarter Earnings Season will come to an end, and 2011 can finally be put to bed. If you simply summed the daily price changes over roughly 250 trading days, the market would have changed 250% last year. However, the market finished precisely where it started. One might infer that such volatility simply means a dead year. On the other hand, I am inclined to believe that we ended 2011 with an undecided bull-bear tug-of-war that appears to be intensifying. Before we get ahead of ourselves, let’s consider the forces working against a continued rally and why we expect a modest pullback from current levels…

What’s ahead in 2012 and beyond? That’s a bigger topic than we can address in one edition of Market Perspectives. However, our condensed outlook for the year is that U.S. investors, fatigued by the banal and incessant European debt crisis, may be more inclined to put a stronger emphasis on domestic securities for their investment options. As long as domestic economic data remains reasonably strong and rising, it is plausible to expect a continuation of the latest rally…..

We can finally close the books on what turned out to be a very challenging year filled with volatility. No one can dispute that 2011 was a conundrum of sorts and much of that puzzle remains to be solved. Even the die-hard bulls were ready to throw in the towel as we headed into the final trading days of the year. Trading volume remained weak as traders tried to figure out how to position their portfolio allocations for the New Year…..

Throughout 2011, Eurozone treaty talks have become more entertaining than effective.  The latest efforts came up short on enforcement mechanisms, as well as a timeline for implementation. Following their usual urbane and categorical speeches, the Eurozone nations agreed on stricter policies, thus eliminating the threat of exceeding debt-to-GDP thresholds; without implementation, this became yet another hackneyed attempt at fixing their growing debt crisis.