"Fred's Fab Four" from www.theFREDreport.com is designed to be a look ahead at the next year, to see if there are any interesting themes and such that we see. Understand that, like all things in the FRED Report, we will be monitoring our signals to actually make recommendations. But, if signals suggest that some of these themes are starting to occur, we will recommend them and will go with it! Our overriding theme is that the economy is going to get better, albeit slowly, and that we will also see continued improvement overseas. This should cause some changes in the inter market relationships we have become accustomed to, and that will be the gist of this article. First we will talk about the U.S. equity markets. As we write this we are seeing some cracks in the intermediate technical picture of the markets. Sentiment indicators are moving into bearish positions, and some breadth indicators are weakening as well. This points to a significant peak, and a tough first and possibly second quarter for equities in 2011. We think that 2011 will ultimately be positive, though, with a strong second half of the year. Second, let's talk about foreign equity markets. We continue to feel that Asia and developing markets will be "where the action is". We see continued systemic problems in Europe that will impact their markets, but believe that world markets are in the process of discounting this. We see continued economic strength occurring in Asia and ultimately world markets, which will in turn impact commodity prices and interest rates. European debt problems should be part of the overall backdrop - the "wall of worry" that bull markets climb. Third, let's talk about the currency and interest rate markets. We believe that as part of the European "wall of worry" the dollar will strengthen, and foreign currencies weaken. There is much talk about the dollar losing its status as a reserve currency - but if the Euro is pressured by European problems money should flow out into the dollar. The dollar may have problems short-term, but when we look at the alternatives, there does not seem to be a viable alternative to the buck. At the same time, our bonds should stabilize, with enough buying from abroad to counteract inflationary forces. This means that we believe the dollar will rally along with stocks and interest rates will remain stable. Fourth, let's talk about commodities. We believe that next year will be the "year of spot shortages" as the economy improves. Commodities should rally next year, in spite of a stronger dollar. Indeed - the stronger dollar should be one of the "walls of worry" that commodity prices climb. 2011 should be the year that the deflationary scare finally leaves the markets, and gives way to slow inflation (what was called creeping inflation in the 1950's). Gold as an inflation hedge, and oil (because of improved economic performance) should both rally, and agriculturals and such should also participate.
To conclude, we see a year where stocks could run into trouble in the first part of the year, followed by a strong end of the year. Surprises along the way will be that deflation fears abate, and commodities rally as the dollar gets stronger. Many are looking for a large rise in rates - we are looking for rates to stabilize, and gradually rise. Money should start to come out of bond funds and back into equities as 2011 progresses. The last surprise will be a stable to rising real estate market. Virtually no one see this as possible, but we note that hard assets do well in an inflationary environment - and real estate is a hard asset. Obviously we are talking about solid real estate investment in good areas. However, we are seeing this start to happen in neighborhoods in New York City and Atlanta as well as other areas around the country like Manhattan Beach, California which was very speculative. This last is our most risky forecast, but it should be fun to see how it plays out.