page intro

Market View January 2011: What’s In Store for 2011

2011, What’s in Store…

image003Happy New Year and may 2011 investing be as profitable as 2010. As we enter 2011 we can expect a mixed bag of opportunities and challenges.  Emerging markets continue their growth while the U.S. hangs on and Europe fights for survival under mountains of debt and devaluing currencies.  Since August, when Ben Bernanke, Fed Chairman, began telegraphing his intention to launch QE2, Treasury and corporate bond prices have dropped sharply, while the stock markets have climbed higher.  This has the effect of prolonging our current positions of commodities, precious metals and stocks (those companies which have hard assets and/or sell to emerging markets).  This trend can continue until interest rates rise high enough to compete with this list.  At that time, bond fund investors will have been decimated and bonds will sell at discounts that should offer us very attractive returns as we rotate parts of our portfolio to the newly advantaged sectors.

One of the biggest errors in investing is the view that the economy and the markets act as one.  It is important to understand that the European and U.S. markets are made-up of hundreds of multi-national companies (MNCs) whose revenues have grown so large that they dwarf the GDPs of many countries.  The MNCs earn their profits outside their host country avoiding countries with adverse taxation (such as the U.S. which now has the highest corporate tax rates of any competitive country).  It is estimated that there are more than 20,000 MNCs operating in the global economy, with over 100,000 overseas affiliates running cross-border businesses.  Through a tactic known as “transfer pricing”, MNCs allocate income to subsidiaries in tax havens while attributing expenses to higher taxing countries.  Governments will no longer be able to rely on corporate taxes as a means for more spending.  However, countries like Brazil are realizing this now and have reduced corporate taxes and are reaping the benefits of full employment.  They are actually importing labor as there are more jobs than people.

For investing, there is a more important ramification of QE2 and MNCs.  In its simplest form, “quantitative easing,” (QE) is nothing elixermore than massive money printing, designed to dilute the value of US-dollars floating in circulation.  And since most globally traded commodities are priced in dollars, when the value of the dollar goes down, the prices of commodities and precious metals usually climb higher.  China’s trade minister Chen Deming lamented, “Uncontrolled printing of dollars and rising international prices for commodities are causing an imported inflationary shock for China and are a key factor behind increasing uncertainty.” The US money supply, as measured by MZM, has mushroomed by nearly $500 billion since late April, and is fueling the explosive surge of the “Commodity Super Cycle,” to record heights.

Therefore, the only viable option left for Beijing that could hold down the cost of soaring raw materials, is to succumb to pressure from the Fed and US-Treasury, and allow the yuan to climb further against the US-dollar.  Right now, Hong Kong based currency dealers expect the yuan to gain roughly 6% this year, hitting 6.25 /dollar in late 2011.

Further, QE2 is contributing to the global trend away from the dollar.  I expect that sometime this decade we will see the dollar’s role as the world’s currency reserve, be replaced with a global basket of currencies and/or commodities.  Though the dollar will certainly remain an important ingredient in such a basket, it will still have to weaken.  Going from the sole currency reserve to a shared position means that precious metals and commodities will continue to rise in dollar prices.

Missing the importance of this has prevented most investors from participating in the gains that hard assets have provided.  More unfortunate is the fact that most Americans are not investors – they may have a 401(k) which offers very limited choices.  Sadly, those choices seldom offer much or any exposure to precious metals, commodities, or MLPs and participants are typically invested to a fairly large percentage in cash and bond funds – the two areas which will suffer the most.

INVESTMENT OPPORTUNITIES

mw20112There are very few Amazons, so investment opportunity, today, requires finding companies that are selling to the emerging markets or have needed resources or strategic hard assets.  I’ve discussed emerging markets, high dividend stocks, hard assets, and natural resources in many issues over the past five years, so there is not much new to report, other than that they are still in tack and should remain so until interest rates rise enough to compete for investment dollars.  At that time, bond fund investors will have been decimated and bonds will be selling at attractive discounts, providing us another opportunity.

CHINA

Predicting the future of the Chinese economy rests on a trend that has held true for thirty years. Like a boulder rolling down a slope, China’s economic growth continues to pick up momentum.  The immense force of 1.3 billion people struggling to rise above poverty is the driving force behind that momentum. Although China has become the world’s number two economy, the na­tion remains much poorer than western countries on a per-capita basis. That means the Chinese dominant obsession will continue to follow the maxim of the late Supreme Leader, Deng Xiao Ping. He famously said, “To get rich is glorious.”

The Chinese are doing just that and consumer spending is growing at a rate near 18% per year.  Along with government spending, store2011there are hundreds of billions of dollars being poured into companies building infrastructure or serving the needs and desires of the growing numbers of the middle class.  From cell phones to hamburgers, the growing consumer class wants the same types of luxuries found here.  Even Rolls Royce sales in China will soon eclipse those in the United States.  This year, they expect to sell 800 of the ultra luxurious Ghost sedans at a price of nearly $1,000,000 each.

Though we only held a few positions in the BIC (Brazil, India, China) this year, and none in Russia (I don’t like the idea of making 30% until the government decides to own 100% of my assets), I expect their markets to be attractive again, once they no longer feel the need to raise interest rates or otherwise tighten fiscal policy.  Another example of sector rotation, this should offer us another opportunity to re-enter these markets in a significant way, at attractive prices and attractive long-term growth potential.

UNITED STATES

Though the economy struggles to add enough jobs and the dollar is under attack, the U.S. is still the world’s biggest economy.  It is the most innovative and it is highly efficient by any standard.  Surprisingly, only one in five Americans believes that the U.S. has the largest and disappointingly, only 30% of Americans say their portfolios have reaped notable gains since the market low in March 2009.

This should be the year for the large multi-nationals which have accumulated mountains of cash and are operating lean and efficient businesses.  Generally they are selling at attractive valuations and can offer growing dividends.  Choosing those with the best valuations and the best exposure to emerging markets should provide us another profitable opportunity.

Of course we will pay close attention to the amount of leverage at hedge funds and banks, which combined with the bad mortgages, caused the worldwide pain of 2008.  If interest rates rise, we will rotate our portfolios accordingly (as noted above).  The wildcard is Europe.  We will monitor the sovereign debt problems there and act accordingly as Europe and the U.S. are economically conjoined.

BOTTOM LINE

I never expect a smooth ride, but this year offers opportunities in almost every scenario, though it will certainly require making changes along the way.  We should be able to make any rotations needed while still managing for another year of gains without much taxation.

May 2011 be your best year for good health, good luck and good fortune,

Frank

PH. 512.345.6789 (5, 1 thru 9)

Frank@BeckCapitalMgmt.com

www.BeckCapitalMgmt.com

www.ProPlayerInvesting.com

———————————————————————————————————————–

Information included in this electronic newsletter is not to be taken as investment advice.  The information is general in nature and may not be appropriate for your individual situation.

The comments, graphs, forecasts, and indices published in Stock Market View are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we have investors who enter various investments at different times. If you have a friend, co-worker or family member who you feel could benefit from Stock Market View, please feel free to forward this edition.

To make sure you don’t miss our urgent updates, add Frank@BeckCapitalMgmt.com to your address book.

If you have received this from a friend and would like to receive the next six issues at no cost or obligation, please send an email to FreeStockMarketView@FrankBeck.com (you may click on the link to send the message).

Please feel free to share this letter with friends, in its entirety only.

Copyright Warning and Notice: It is a violation of federal copyright law to reproduce all or part of this publication or its contents by any means.  The Copyright Act imposes liability of up to $150,000 per issue for such infringement.

Disclosure: Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind. The information contained herein may contain information that is subject to change without notice. Any investments or strategies referenced herein do not take into account the investment objectives, financial situation or particular needs of any specific person. Product suitability must be independently determined for each individual investor. Frank Beck & Beck Capital Management explicitly disclaims any responsibility for product suitability or suitability determinations related to individual investors. The investment products discussed herein are considered complex investment products. Such products contain unique risks, terms, conditions and fees specific to each offering. Depending upon the particular product, risks include, but are not limited to, issuer credit risk, liquidity risk, market risk, the performance of an underlying derivative financial instrument, formula or strategy. Return of principal is not guaranteed above FDIC insurance limits and is subject to the creditworthiness of the issuer. You should not purchase an investment product or make an investment recommendation to a customer until you have read the specific offering documentation and understand the specific investment terms and risks of such investment.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

READY TO LEARN ABOUT OUR 30,000 FOOT VIEW OF THE WORLD?

Connect with us to learn more about our in-house investment research and management process.