“Vision without implementation is hallucination.”
The quote is from Thomas Edison and reminds me that I can pontificate and prognosticate all I want, but it comes down to taking action in order to accomplish anything. Tis the Season for predictions and the headlines are full of them relative to 2011 and the markets. I learned many years ago that being a prophet was not my calling in life. I find it more logical to find the trends and join the move up or down in the markets. So, with that in mind the following is an outline of the trends in play and those developing as we progress toward the beginning of a prosperous new year.
The economy is improving ever so slowly. My baseball coach used the analogy “slower than molasses running down a tree in January" to describe my running, and that quote applies to the economic recovery in place. Albeit slow, it is still making progress. We have seen improvements in the ISM manufacturing and services data over the last quarter. Unemployment is still high, but bottoming relative to lost jobs and we are seeing the private sector begin to hire. Consumer confidence is on the rise as the holiday sales validate. The Federal Reserve continues to be more than accommodating with plenty of money supply and they are not likely to slow that process any time soon. Bottom line, it is a slow and painful recovery that shows all the signs of continuing in the new year.
An early gift moving toward the new year is growth in the financial stocks (NYSEARCA:XLF). They bounced off the lows of the six month trading range and have progressed to a level of interest. Why the renewal for the sector? Mergers and acquisitions are on the horizon in the banking sector (NYSEARCA:KBE). With most of the bad news out of the way and the balance sheets reflecting reality, the financially solvent banks will look to acquire, on the cheap, those that are not so sound financially. This could get interesting as the regional banks (NYSEARCA:KRE) and brokerage firms (NYSEARCA:IAI) look to capture market share. The current trend is higher and the opportunities could make 2011 a prosperous new year for the financials.
Commodities were all the buzz in 2010 but were also volatile. PowerShares Commodity Index Tracking ETF (NYSEARCA:DBC) started the year at $24.62 and hit $20.80 on the low in May, but managed to rally back to $26.88 to net nearly a 10% gain. The end result was not the outcome many expected based on headlines. As with any sector there were parts that shined. Cotton (NYSEARCA:BAL) more than doubled, coffee (NYSEARCA:JO) was up more than 50%, gold (NYSEARCA:GLD) gained over 25% and silver (NYSEARCA:SLV) was higher by 70% during the year. The outlook for next year is more of the same, the parts will do better than the whole. Look for the agriculture commodities (NYSEARCA:DBA) and businesses (NYSEARCA:MOO) to be one of the leaders in the first half of the year as the trend shifts to the upside.
Energy (NYSEARCA:XLE) made a turn mid-summer to the upside and has not looked back. The equipment and services (NYSEARCA:IEZ) companies were the dominate leader for the sector. My theme going forward is alternative energy. We are likely to see growth in solar (NYSEARCA:TAN) and wind (NYSEARCA:FAN) energy, but coal (NYSEARCA:KOL) and natural gas (NYSEARCA:FCG) look bullish as we start the new year. The price of crude rising to the $90 level is pushing increased use in the alternative energy resources. If the price of oil remains high and potentially moves higher, the demand in alternative energy will rise. Definintely an area to spend time digging for the winners.
Consumer services (NYSEARCA:XLY) was another winner the second half of the year. The consumer returned to the malls and spent money, stimulating growth in the economy. Will this trend continue in 2011? I am not as optimistic on the growth side, but the current level of spending is not expected to decline. The winner in the consumer driven sector could be the durables. The likes of Protor & Gamble (NYSE:PG) have lagged the sector overall and could gain some pick up into the new year. SPDR Consumer Staples (NYSEARCA:XLP) is a good starting place to watch the sector overall. Digging into the ETF provides the leaders.
As we end one year and begin a new, the trend is still your friend. What we think now can change dramatically in a short period of time. Watch the old trends as they come to an end and new ones begin. Take a proactive approach to managing your money. Don’t over stay your welcome in sectors and keep your focus on the horizon for the new leaders. Remember, “Vision Without Implementation is Hallucination!” Take the actions necessary in 2011 to make it a great year.
I want to wish everyone the happiest of holidays and very prosperous new year!
Disclosure: I am long XLE, IEZ.