Market Update 2.22.11

We generally post on Sundays. However, given the market activity today and our research in the last several weeks we would like to update you on our view of the markets going forward. It is obviously difficult to say what the markets will do tomorrow or how they will end the week.

We looked back in the history of our indicators and actually 2004 seems to represent 2011 well for the US. The 2000-2002 period saw a decline almost exactly a similar magnitude of the 2008 period. However, from peak to trough 2008 fell by around 15% more. Incidentally the 2003 recovery increased 15% less than the 2009-2010 recovery. This gives us some incidental evidence that the two time periods are similar. Our BFIA measures for February 22nd 2004 are almost identical to today's levels. In 2004 the market did not move very much over the year until October 2004. We believe the same will occur for 2011. The equity market will not move much over the year and reap its gains in a 6 week period. Therefore, we believe now is the time to hold off on all equity investments as there will be a pullback and narrow trading range for most of the year. Currently we are more in favor of developed equity markets than emerging if one is to hold equity. We do see energy making gains for the year. After the pullback we do favor high yielding assets such as high yield corporate bonds and real estate investment trusts until we see signals to put money back into equities.

Summary:
High Yield Corporate
REITs
Energy (Energy companies and oil itself)
Natural Resources (Lower exposure).

If investing in equities: Equity Markets to Outperform are US, Canada, Japan, and Russia. (Possibly Australia and Europe therefore lower exposure). Refrain from emerging markets for now.

There will also be periods to take advantage of shorting the market. It will be the only way to make significant gains for the year.

Once this week plays out we will post our call of whether to short or not.