Looming Rate Hikes and Politics of the Tax Cut Extension (1/5/11)

It is a new year… and with that, new predictions and risks. 2011 will likely be focused on two key points:

1) Rising interest rate fears
2) European debt market fear for additional bail outs

In either case, you need to ensure you are well prepared. You don’t want your portfolio to take yet another hit especially if you are nearing retirement or are less than 5 years away.

Rising rates can be easily managed; it will mean two things:
1) Bond prices will fall so, if you cannot hold on until maturity, think about reallocating this asset class to asset classes less vulnerable (not an all encompassing statement).
2) As for investing in real estate, you will need additional incentives or a longer term view to offset the hike in interest rates. What this says to me, along with quantitative data from multiple sources, is that equities look like the asset class of choice going forward.

As for the European countries, we need to just wait and watch the risk parameters as they may, or may not, unfold. As the U.S. strengthens, it will continue to behave as a safe-haven in the event of any additional bail-outs. We will also see the dollar rise in this scenario and a continued rise on gold and likely silver. I personally am not overly concerned but many smart and well respected individuals are, so let’s keep a good eye out for what plays out over the year.

On the positive front:
We have seen some good data for the month of December, specifically from autos and consumer spending. The market has extended its highs and now looks like it may be time for some consolidation in this longer term bullish trend. We are also seeing some major M&A activity in technology, whether it be direct investment or traditional buy-outs. We saw solid M&A activity during the fall which displayed easing of credit and strong money flow into the system; this is a good macro sign that eventually trickles right through the entire economy.

My ‘jobs’ commentary seems to be playing out to the tee. I don’t necessarily feel great about this since unemployment is still so high, but it unfortunately is likely to remain. Some of initial channel checks supports the notion that hiring is picking up steam. Companies seem to be strategically acquiring intellectual capital. The extension of the tax cuts is certainly a help. Although I have to wonder, why did they only extend them for two years? Two opinions:

1) Obama wants to have this as a debate during the elections, or
2) Obama doesn’t want to be re-elected

The latter would be interesting, since he would be the second president in history to do this. I am not sure why anyone would want to leave such a touchy subject open for public scrutiny during such a crucial time, especially with all the criticism his staff has taking over the past year. Whether you believe he is doing a good job or not is not the debate; the debate is all about what will occur over the next two years and how will it directly affect you!

Happy New Year!