Market Overview

Clear As Mud

Those of us that were looking for some sort of resolution on the Greek debt crisis that would firmly point the dial in one direction or the other have once again been disappointed.

Despite another round of bailouts - this time about 130 billion euros on top of the original 110 billion euro 2010 bailout package - doubts persist that Greece will be unable to adequately implement austerity measures that cut spending and still generate sufficient revenue to pay back principal and interest on its existing debt.

Quite simply the situation is about as clear as mud and has been mismanaged from the outset, when the crisis was originally misdiagnosed as one of liquidity not of solvency. Given the level of skepticism that the bailout will work as intended most investors have a negative outlook on Europe as a whole, which is easy considering the 17 country eurozone economy shrank 0.3% during the fourth quarter of 2011. While the eurozone would have to have another down quarter to be officially considered in recession some of the component nations are already firmly entrenched in shrinking economies.

This of course begs the question, where are the opportunities in today's markets?

Developed markets in most cases are struggling. The eurozone has problems both with debt and growth. Japan also has no growth and unfavorable demographics which don't portend any significant growth in the near future. As always it's not wise to paint the entire developed market (ex-US) economy with one broad brush - but there are bright spots, such as Canada. Australia also continues to be an interesting case as long as China continues to grow rapidly and import many natural resources from Australia.

If your objectives are longer-term and risk is something you're willing to take on there will undoubtedly be opportunities in individual names - both in equity and fixed income that are marked down unjustly due to broader market sentiments. If this is your strategy, understand the cash flows of the company you're investing in and its degree of economic sensitivity.

On the fixed income side seriously consider the company's 5 C's to determine whether the investment is sound:

  1. the Character of the firm
  2. the Capacity to repay debt
  3. the Capital available
  4. any Collateral that backs the debt issue
  5. any specials Conditions

While most developed markets look unattractive, emerging markets seem to provide many opportunities. Emerging countries in general have much lower debt to GDP levels than developed countries. Yields on emerging markets debt are also much higher than what's available in developed markets - and the balance sheets of many emerging economies are actually in much better shape than those of developed governments. Growth forecasts are also much higher in the emerging world, while interest rates still look fairly accommodating.

The US continues to look attractive from an equity perspective. While growth in the US for 2012 is not expected to set the world on fire, it does mean the economy is still growing and the recovery, while slow, is taking root. Interest rates are low and according to Fed Chairman Bernanke are going to stay where they are for a while.

One benefit of investing domestically is not having to worry about currency fluctuations which can add to, or wipe out, overseas gains in foreign currencies – something to consider if investing in developed or emerging markets. Domestic fixed income looks less attractive due to the low yields, especially on treasuries. Opportunities still exist though they just need to be uncovered with greater effort and are much fewer and further between.

As with any kind of forecast, economic in particular, everything is subject to change without notice based on news and events either good or bad so any investments should be entered into carefully and with full knowledge of the risks involved. The only thing we can predict with certainty is that the rest of 2012 will be much like the last year – unpredictable.

About the author: Michael Prus is the President and Founder of <http:>Scale Investment Group, LLC</http:>, a registered investment advisory firm based in White Lake, Michigan. The company manages money for clients and is a consumer advocate, most notably championing greater transparency of the investment advisory industry and lower fees for investment products as well as portfolio management services. Contact Michael directly at mprus@scaleinv.com.

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