Monthly Newsletter

February 7, 2012

All Financial Sectors Move Higher to Start the New Year

It seems like this is the first month in awhile that I haven't mentioned Europe in the title of my letter. For over a year now, Europe has been the asterisk next to any good news we were seeing in the

. It has been "the

economy is improving but all bets are off if Europe spins out of control" or as I wrote last month, "Stocks begin 2012 on an up note but don't forget about Europe". Well, for the first time since October, when the markets began their rebound, investors are sensing that a global recovery is underway and regardless of what happens in Europe, the recovery will continue. And there are indications that investors are not being overly complacent. There are real signs of improvement in the European financial situation. One key indicator, the interest rates on sovereign debt, has been showing substantial improvement. It was just weeks ago that the yield on the Italian 10 year bond had risen to over 7%, raising concerns that if

Italy

had to pay such high rates to refinance its debt, that it would, like Greece, move unavoidably towards default. But the yield has since fallen to 5.63%, which reflects a much less dire environment. The general improvement in the world's credit markets is reflecting a feeling that we are not facing another Lehman-like situation, when global financial markets were on the verge of seizing up. The European leaders appear to be jockeying for position, trying to resolve the crisis while exposing their countries to the least amount of pain. But they do seem to be on the road to a resolution. The daily ups and downs of the headlines will undoubtedly continue, but the sense of urgency has diminished.

Which brings us to the good news regarding the gains being realized in just about all financial markets in 2012. The S&P 500 was up 4.4% in January, but the gains were not limited to large US stocks. Small cap stocks rose about 7%, emerging markets saw gains in the range of 10-11%, and precious metal stocks also rose 10-11%. In last month's letter, I mentioned how the latter 2 groups had been a significant drag on performance in 2011. I am happy to see that they are now contributing to the upside. And for those of you who believe that a rise in stock prices must result in falling bond prices, that was not the case last month as bonds had one of their best months. The fact that interest rates stayed so low in the face of a booming stock market is puzzling. If the economy is truly recovering and the chance of a recession becoming much less, why would investors still flock to the safe haven of Treasurys at generationally low rates? Today we saw interest rates begin to move higher and that is bound to strike fear in bond investors. If this is the year that interest rates finally begin to rise, we could see a flood of money coming out of bonds, causing losses in traditional bond investments. I have discussed before my fixed income strategy of balancing non-traditional bond funds with more traditional ones, being able to do well regardless of the direction interest rates move. But I will be watching what happens here closely.

I have gotten you all feeling good and I haven't even mentioned the great jobs report we got last Friday. 243,000 jobs were created in January and the unemployment rate has now dropped to 8.3%. The data in general for the

economy has been looking more positive. And as I mentioned last month, even the moribund housing market has been showing signs that the bottom is in and the picture is improving. The good news doesn't stop with the

. Besides Europe, the other area of the world that was a big question mark in 2011 was

China

had a terrible year in 2011 and its stock market dropped about 30%. Inflation was a major problem and the monetary authorities had to slow growth by raising interest rates. This had a major effort on the global economy because

China

is the chief engine of growth in the world. The tide now seems to have turned. Interest rates have been cut to stimulate the economy and their stock market is up 15% in the last 6 weeks. The same can be said for

Brazil

and India and most of the emerging market world. If a global synchronized growth story is realized in 2012, more gains can lie ahead for the world's stock markets.

Eastman Kodak Update - As you all know, Kodak did finally file for bankruptcy last month. If you are retired and still have your 401K in the company plan, you should definitely consider rolling it over to an IRA. As of Feb. 1st, the fixed income fund, which had been yielding a guaranteed 3%, was dissolved and the assets transferred into a more traditional short term bond fund. Jeff Feldman

Market Data – 2/7/2012

  Dow Jones                  S&P 500             NASDAQ          Russell 2000              10 Yr Treas
    12,878                            1,347                   2,904                    827                             1.97%

Earnings Yield (S&P) Gold Crude Oil
7.65% $1,748 $98.69

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Monthly Newsletter

All Financial Sectors Move Higher to Start the New Year

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