Why 2011 Will Not Be The Easy Year Most Investors Expect

Submitted by: Michael Lombardi

Yesterday came news that Standard & Poor s had lowered Japan s credit rating, as the country failed to cut government spending or raise taxes. But the real news for me Thursday was a report from Moody s Investors Service saying that it may place a negative outlook on the U.S. s credit rating unless the U.S. budget deficit narrows. Could you imagine the havoc a downgrading of the U.S. s credit rating will have on U.S. Treasuries and interest rates?

I ve been writing for months about a homemade bond crisis brewing in the U.S. amid out-of-control government spending. (I don t know why anyone would own U.S. Treasuries right now I don t.) Recently I have also been warning about the municipal bond market and how defaults on debt obligations by U.S. cities, municipalities and states are a serious problem this year.

And reality is starting to hit

New York State took control of Nassau County s finances yesterday, as the county failed to balance its $2.6-billion budget. For those of you not familiar with Nassau County, the county is in Long Island, New York, and has a population of 1.3 million people. Forbes Magazine (2008 survey of richest counties) ranked Nassau County as the second richest county per capita in New York State.

New York, one of the financially strongest states, can take over one of its county s finances, as it obviously has been able to deal properly with its own books at the state level. But how does a state like California proceed to take over a county that can t balance its books, while California itself sits on a $25.0-billion-plus annual deficit? It simply won t take the same action New York has.

On the other side of the economic picture, moving from large budget deficits to consumers, the U.S. Labor Department said yesterday that applications for jobless benefits jumped 51,000 to 454,000 claims for the week ended January 22, 2011. The spike in jobless claims surprised employment analysts, who expected claims to come in at about 400,000.

What does all this tell us?

The U.S. economy is far from out of the woods. Natural disasters such as storms and tornados leave a path of debris in their aftermath. The 2008-2009 recession has left many countries (not just the U.S.) with a plague of debt. And I don t think most politicians realize how serious the problem has become nor do they know how to deal with it.

The year 2011 it will not be the easy year that most investors and analysts expect.

Michael s Personal Notes:

It finally happened. General Motors Company (NYSE/GM) sold more cars and trucks in China in 2010 than it did in the U.S. the first time in the company s 100-year history that it has sold more vehicles in a country outside of its primary U.S. market.

A staggering 2.35 million cars and trucks were sold in China by GM in 2010. I view this event as more than just middle-class Chinese getting access to vehicles, I see it as a continued symbolic shift in the balance of economic powers from the Americas to Asia.

As sales of autos and trucks continues to rise in China, automakers and auto-parts makers will look at opening more plants in Asia, shifting the geographic sales focus of the carmakers and putting pressure on the remaining North American auto plants unless demand for cars and trucks remain strong here at home.

Where the Market Stands; Where it s Headed:

The Dow Jones Industrial Average opens this morning up 3.6% for 2011 and only 10 points away from the physiologically important 12,000 level. When will we get that close around 12,000? Soon, dear reader, soon.

As we close the final full week of January, the stock market has put on a great performance so far this year. But I believe this will be one of those years that the January Effect will not work. The old myth that goes, If the market rises in January, it will rise for the remainder of the year, I do not believe will hold true in 2011.

Immediate-term, I m looking for more gains for the stock market. Short- to long-term I m turning bearish on stocks due to excessive bullishness on the part of investors and stock analysts and rising interest rates.

What He Said:

The Real Threat to the Economy: U.S. retail sales are falling, the producer price index is crashing, house prices, car prices are all falling and no one is talking about deflation but me. Fed governors are still talking about inflation they ve got it wrong. There s no need for me to get into the dangers of deflation, as I ve written about them (many times) before. Let s just put it this way: Deflation is about the worse economic state a country will experience. The risks to the U.S. economy in 2007 are greater than I ve seen in years. Michael Lombardi in PROFIT CONFIDENTIAL, November 15, 2006. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

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