Like it or not, US equities remain very cheap. S&P 500 fair value under The Rule of 20 is 1500, 20% above current level. The underpinnings (rising profits and low inflation) are reasonably solid at this juncture.


While economic challenges remain, recent news are pointing to a slow gradual grind up. Importantly, the US consumer has shown a good balance between deleveraging (saving) and spending, If employment keeps improving, the US economy will at worst muddle through during 2011.

Earnings have continued to surprise thanks to big productivity gains which should be slower in 2011. However, top line growth could improve a little providing some offset. One important development in 2011 could be a significant reduction in US corporate tax rates.

Inflation remains very low but deflation risk has declined along with the risk of a double dip. Interest rates should stay quite low for most of 2011.

All in, the road is still full of bumps and potholes but valuation is still attractive. The Fed keeps pumping liquidity which needs to find a home. As investors become more hopeful that employment is really recovering, funds flow out of fixed income into equities.

Meanwhile, many emerging economies are experiencing rising inflation which is prompting many central banks to tighten. The risk/reward tradeoff is changing for the worse in these markets.

Currency imbalances and sovereign debt risks will continue to make gold appealing, even though the exit door is getting narrower by the day as hot money piles up into gold funds. The day of reckoning will be when the Fed decides to stop priming the economy, not anytime soon!



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