Monday, January 24, 2011

Our 2011 Outlook (no 3-D glasses required)

Over the last 90 days I have been keeping a watchful eye on our equity markets, general economic news and perhaps more important, the US consumer sentiment. There have been encouraging signs that the economy may have finally stopped sliding into the abyss and by all accounts moving forward under the new financial paradigm. I’d like to refer to this as the “New Normal”. Unemployment has held steady, the Christmas shopping season appears to have beat expectations, the stock market has had a fantastic run over the last 180 days. GM complete its bankruptcy process and most of the largest banks have repaid the TARP money lent to them. Hey, JP Morgan Chase recorded outstanding record profits for Q4.
All of that said, before we take that collective sigh’ and pat ourselves and our fearless leaders in Washington on their backs for a job well done, I’d like to turn some our attention to a news story which was recorded by 60 Minutes in which the title Day of Reckoning and where wall street brain trust Meredith Whitney whose focus of this story was to paint a fairly bleak picture of the individual State balance sheet(s) and the windfall of potential risks. While the news story (seen here ) did have in my humble opinion a few misleading conversation points, it is true that the bulk of the attention has been paid to the national financial deficit problem, not our individual state issues (see Illinois) where these problems have been getting progressively worse over the last 10 years. The issue I am most concerned with as it directly relates to not only to Efinity’s core businesses, but our countries general way of life; the seemingly non-issue of inflation. There has been a growing undertow of consumer inflation in several areas and while gas prices tend to get the most headline coverage, if you compare just the last 6 months of the everyday costs of meat, bread, milk, corn, you’ll begin to see changes which on the onset don’t appear much (.10c to .30c) however these have been in a fairly stable gas price environment. With the highly anticipated summer gas price increase in the 20-30% range (as found in the futures market), we could see a dramatic change in the ability for many American’s to operate their daily lives as they have been. For our older members of society, it’s even worse as not only did many of them have significant capital stripping take place from 2007-2009 but there is a HUGE gap in anticipated appreciation and available returns of investment in savings and market rates. Add the growing concerns in the municipal bond markets and you’ll find the options are even more limited. So, in short order 2011 will be more of the same. A country with potential but with serious legacy problems it needs to deal with, which will come at a cost to all of us and an impediment to GDP.