Strategy

 2011

Forward Thinking...

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  US  Macro  Indicators  looking  be=er  since  fall  2010,  
the  risk  of  a  double  dip  rapidly  disappearing

Index of Leading
g Economic Indicators
Index
120

110

100

90

80

70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Recession Leading Index (Dec 17 release, Nov = 112.4)

Source: The Conference Board http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy

-­‐  Import  and  Export  are  growing

U.S. Imports and Exports

Billions of Dollars
240
220
200
180
160
140
120
100
80
60
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Recession Exports (Jan 13 release, Nov = 159.6) Imports (Jan 13 release, Nov = 198)

Source: Bureau of the Census http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy

-­‐  Non-­‐Manufacturing  growing  rapidly

ISM Non-Manufacturing Activity Index

Index Jan 05 release,, Dec = 63.5

70

60

50

40

30
2007 2008 2009 2010

Source : Institute for Supply Management ™ http://www.dallasfed.org

Friday, January 21, 2011
 Strategy  2011
Outlook  US  Economy

-­‐  as  are  durable  goods

New Orders for Durable Goods

Billions of Dollars
250
235
220
205
190
175
160
145
130
115
100
85
70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Durable Goods (Jan 04 release, Nov = 195.7) Excl. Transportation (Jan 04 release, Nov = 149.7)
Recession

Source: Bureau of the Census http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  Risk  of  deflaGon  melGng  away

Producer Price Index

1-month % change Jan 13 release, Dec = 1.1

35
3.5
3-year average
3
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
-3
2007 2008 2009 2010

Source: Bureau of Labor Statistics http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  Risk  of  deflaGon  melGng  away

Consumer Price Index

Jan 14 release, Dec = 0.5

1-month % change
15
1.5 3-year average

05
0.5

-0.5
05

-1

-1.5
15

-2
2007 2008 2009 2010

Source: Bureau of Labor Statistics http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  and  CommodiGes  have  been  a  big  driver

Commodity Prices
Expect a slow down in
Metal prices and a possible
1967=100, EOP correction here as the USD
1,100 gets stronger
1 000
1,000
900
800
700
600
500
400
300
200
100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
KR-CRB Spot Commodity Price Index: Metals (Jan 02 release, Dec=1006.2)
KR-CRB Spot Commodity Price Index: Raw Industrials (Jan 02 release, Dec=583.8)
Recession

Source: Commodity Research Bureau http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  Jobs  are  coming

Below 400K, you will see real job

creation, we need to break the 400k
barrier to turn bullish on Jobs

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  Jobs  are  coming...
but  it  will  take  Gme  to  normalize

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  the  USD  is  weak  but  should  strengthen
as  the  Economy  gets  be=er

Real Value of the Dollar

The low USD was a main
March 1973 = 100
driver in the market rally
120 and the commodity pop, it
needs to be monitored
carefully, a rapid rise would
110
signal a market correction
in the making.
100

90

80

70
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Exchange Value of the US$ (Jan 10 release, Dec=84.4)

US$ vs Major Currencies* (Jan 10 release, Dec=82)

* Euro Area, Canada, Japan, UK, Switzerland, Australia, and Sweden

Source: Federal Reserve Board http://www.dallasfed.org

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  Real  Estate  market  shows  sign  of  
“bo=oming”

Signs of stabilization

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  Real  Estate  market  shows  sign  of  
“bo=oming”

Future Constructions
in the Pipeline?

Friday, January 21, 2011

 Strategy  2011
Outlook  US  Economy
-­‐  We  forecast  a  Real  GDP  Growth
between  3.5  to  4%”

Real GDP
1-quarter % change,
annualized Dec 22 release, Q3 = 2.6
6 3-year average

4
4%

-2

-4

-66

-8
2007 2008 2009 2010

Source: Bureau of Economic Analysis http://www.dallasfed.org

Friday, January 21, 2011
 Strategy  2011
EquiGes  to  Outperform  Bonds

RaGonal

-­‐  P/E  MulGples  are  relaGvely  low,  below  the  historical  average  and  
really  low  when  compared  to  bond  yields
-­‐  Job  creaGon  and  consumer  confidence  should  pick  up  in  the  coming  
months  and  create  a  posiGve  momentum  (watch  the  400k  Weekly  
Claims  mark)
-­‐  Retail  Investors  are  gradually  returning  to  equity  and  increased  
volume  should  translate  in  higher  price  and  P/E  mulGple  expansion.
-­‐  Everyone  is  waiGng  on  the  sideline  for  the  correcGon,  before  
jumping  in,  this  will  be  supporGve  of  the  market  for  the  year
-­‐  Strengthening  of  the  economy  will  bring  an  expectaGon  of  gradual  
normalizaGon  from  the  Fed  and  send  10  Yr  Treasuries  over  4%  by  
year  end.  Long  Bond  holders  will  get  hurt.

Friday, January 21, 2011

 Strategy  2011
EquiGes  to  Outperform  Bonds

Risk
-­‐  Chinese  Gghtening  brings  a  hard  landing  in  Asia  and  
contaminates  other  markets
-­‐  Fears  of  default  from  Spain
-­‐  InflaGon  and/or  Oil  price  gets  out  of  control
-­‐  Rapid  rise  in  the  USD
-­‐  Market  realizaGon  that  the  fiscal  situaGon  in  Japan  is  catastrophic  
(more  in  debt  than  any  European  or  Caribbean  country!)
-­‐  ConGnued  deterioraGon  of  the  Real  Estate  and  Job  market.
-­‐  Low  VIX  illustrates  complacency  in  the  market

Note:  If  any  shock  is  experienced  we  expect  the  Fed  
to  move  toward  Q3,  this  would  be  posiGve  for  bonds  
and  EquiGes.  

Friday, January 21, 2011

 Strategy  2011
A  few  Picks  for  2011

1)  PowerShares DB Agriculture Fund (DBA): The rise in oil price

will continue to send the price of food commodities much higher
and demand from China and India will fuel the rally.

2)  ProShares UltraShort 20+ Year Treasury ETF (TBT): This

security will blossom as long term yield goes up

3)  WisdomTree Japan Total Dividend Fund (DXJ): As the Yen

weakens, exporters will do well in the country of the rising sun. It is
one of the only equity indexes that has not really participated in the
rally so far. This ETF hedges against the depreciation of the Yen.

4)  SPDR S&P MidCap 400 ETF and Lazard Ltd (MDY & Laz): 2011
will be the year of Merger and Acquisition, the action will take place
in the mid-cap sector (which is also more resilient to a stronger $)
and Lazard Inc. gets 45% of its revenue from M&A

5) and of course our favorite long term plays: AAPL, XLK, BUD etc.

Friday, January 21, 2011