Wednesday, February 9, 2011

2011 Outlook Update

News this week provides an update on my Outlook for 2011:

Sovereign Debt:

Portugal bonds hit an all time record high today bringing the country one step closer to our first Euro bail out of 2011.

Municipal Bonds:

Obama announced the first step today in what will ultimately be the bail out of municipal (local government) debt.  He is pushing back payments for the money states have borrowed over the past two years to pay unemployment benefits.

Stage 2 will come later this year in the form of a direct government bail out or the Federal Reserve buying municipal debt in Quantitative Easing Part 3.  (Their $600 billion QE2 program ends in June)

Housing:

Zillow reported this morning that home prices fell 2.6% during the last 3 months of the year.  This has pushed the number of mortgages under water (owe more than home is worth) to 27%.

Mortgage rates rose this week from 4.81% to 5.13%.

As home prices accelerate downward and mortgage rates continue to rise look for a new housing "stimulus" program later this year or additional mortgage purchases by the Federal Reserve in their attempt to keep home prices artificially high and unaffordable.

Stock Market:

The stock market continues to be the darling story of the year, hitting new highs daily and clocking in new multi-year sentiment level highs in optimism.  People across the board believe the market is going higher at a time when economic fundamentals are crumbling under the surface.

Big Picture:

We are in a secular bear market in stocks, a cyclical bear market in housing, and the peak of an enormous bubble in bonds.  All three are dangerous investments.

We are currently in the heart of a secular bull market in commodities.  The chart below shows the 20 year bear market in commodities from 1980 to 2000, and the bull market which began in 2000 and continues today.  Pull backs in prices should be welcomed and viewed as opportunities to add to positions.

Blue Line = CRB Commodity Index
Red Line = Gold

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