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Blow a Whistle, It's Almost Halftime!

As the first half of 2011 is quickly coming to a close there is a sense of uncertainty many traders and investors are trying to decipher.   How healthy is the economy?  Will troubles from Europe and Asia spill over into our arena?  What about inflation and higher commodity prices, especially oil?  Political concerns here and abroad?  How will those resolve?  And most importantly the Fed and the QE2 program is coming to an end – how might that resolve and will players start to panic and put our recent market gains in jeopardy?  What's in store for the rest of the year?  Lots of questions to answer, let’s dig in deep.

Economy Needs a Jolt

If it weren’t for the terrible disaster in Japan our economy may have been on sure footing and pushing more than 4% growth.  It was on a roll into March like a steamroller – but this event turned back some growth.  The job market seems to be turning the corner with some good numbers over the last six months.  Maybe we give Bernanke credit for changing business sentiment and the climate to positive rather than actually creating new jobs (which does not directly happen).  But we are stuck with under 2% for the latest quarter and at risk of falling below the nice trend of 2010.  It seems the economy needs a boost – the weaker dollar may have helped multinationals but some sectors suffered – like financials, energy, resources, select tech and retail.  The divergence occurs with transports – rail companies have seen some nice upticks in their business and continue to expand.  We have seen some rather soft numbers reflected in the data lately, perhaps a shot in the arm is coming.

Political Games Aren’t Helping

If we had to rely on our politicians playing ‘nice-nice’ all the time we’d never get anything done.  The business of the people has been skewed by our politicians who have a warped sense of duty and entitlement.  The tea party concept is a good start.  But, I digress – let’s not get started on that subject.  Suffice to say, the issues currently in Washington will HAVE TO BE resolved amicably – debt ceiling, budget, spending, etc.  Much of the rhetoric bounced around these days is just that – political talk and strong-arming.  In the end they will have to do make the right choices – and we all know what those are.

The Fed Has Choices

QE2 is coming to an end in June.  You knew that, right?  Or have you been living under a rock?  What card will the Fed play next?  That is a question upon everyone’s mind.  Maybe we can deconstruct the answer by using the Bernanke’s and the Fed’s own words.  Ok, now we’ve heard numerous time from Ben Bernanke that he wants to see the jobless rate come down and see more people getting jobs.  Admirable – but a direct hit from Fed policy?  Not at all, but as stated above it’ll certainly swing sentiment positively.  Further, he has cited more than once about growth – 3-4% would be ideal – before pulling the plug on any accommodation.  Well, we are not at either point now, so expect continued dovishness.  Other Fed Governors are concerned about a loose Fed policy – but that is more likely jawboning.  They all know it’s about the economy.  A recent report stated the QE2 program did NOT contribute to higher inflation expectations, but commodity prices certainly did.  If these are transitory as the Fed truly believes then we’ll see a good drop in commodity prices over the next few months.  My guess is the Fed uses some more creative tools to keep the economy going.

Concerns Overseas

Since the death of Osama bin Laden the terrorist community seems to be rather quiet.  We cannot let our guard down or face consequences.  The Middle East/North Africa (MENA) is a hotbed of trouble.  It may be evolving politically but there are hot fires in a region that supplies the biggest amount of oil to the world.  The growth engine that is China is a tank and as they try and rein in their inflation there are immense opportunities.  Japan is a tragedy and will be better off in years to come but the short term is fraught with sadness.  In Europe we cannot discount the issues in Greece, Ireland, Portugal and Spain.  The stories seem to change daily – perhaps some day we’ll get the straight scoop and we can all move on.

by Bagger Vance